Notes from a financing class

Last week I attended a really interesting continuing education class on financing changes in our area at GCAAR. Once again, I was reminded how fortunate we are to be in Washington. In our market 18% of homeowners have negative equity, meaning that they owe more on their home than they could sell it for. While that statistic may seem grim, it's 70% and 47% in Nevada and Florida respectively. According to this teacher, the government is starting to wonder whether the push for homeownership is a correct economic strategy. Apparently homeownership rates are back at the year 2000 levels, on a graph there is a very high peak and then it goes right back down to where we were in 2000. What is truly sad about the downturn is how the crash has disproportionally hurt minority communities. So what is coming up and what can you expect from the realtors, the lenders and the government? Expect to see a lot of adds from the National Association of Realtors promoting homeownership as part of the "American Dream" to counteract any change in government strategy. There will also be a push to standardize foreclosure proceedings (so many mistakes have been made due to the fact that each state has different laws and procedures) and reduce loan fraud. Websites like www.preventloanscams.org will hopefully hinder those out to make an illegal buck, as will a provision in the Housing and Economic Recovery Act that requires lenders to take continuing ed and pass tests to continue to lend. Apparently DC is #5 in the country for fraud rates which is why I stress to clients that they they should not be shopping around on the web for lenders and title companies and they need to use someone from my list of trusted sources for their transactions.

On a positive note, the teacher did let us know that there will be changes in the lending industry to make a past foreclosure less of a Scarlett Letter on one's financial history. If the foreclosure is "circumstantial" (job loss, illness, etc...) the borrow may be lendable again in 2 years rather than 7. The key here is that they will need lots of documentation, so I would advise anyone in a foreclosure or precarious financial situation to keep all financial records in order to prove that they didn't simply walk away from their house.

Financing frustrations after the storm

So April was a HUGE month for DC Real Estate. Home sale numbers went up as buyers scrambled to get the tax credit. Well priced homes sold quickly and for great prices. While sellers were thrilled in April, they are less thrilled in May as many of the buyers' loans are not getting approved by the financing deadlines due to mortgage lenders and underwriters scrambling to service the influx of loans. Lenders are working on loans according to settlement date, hoping to have everyone approved and funded by their contractual settlement date, NOT the financing contingency date. At Prosperity Mortgage, the Long and Foster subsidiary of Wells Fargo, they have implemented forced overtime and working weekends for the underwriters. Unfortunately in cyclical businesses, there are times when the lenders and appraisers are simply going to have a larger backlog of work, and you can't hire more people just for one busy month. What I would tell sellers is this: be patient, you benefited from the robust Spring market because your home went under contract, and now it is time to ride out one of the frustrations of a busy market.

FYI- FHA funding fee increasing

It sounds like a big increase but if you look at the actual monthly change it's not going to matter to most buyers...

From Ryan Dailey at Prosperity Mortgage:

Please be aware that, effective April 5th, the upfront mortgage insurance on all FHA loans will increase from 1.75% to 2.25% of the base loan amount. Case numbers must be ordered before the 5th to avoid the increase. Case numbers are ordered when the appraisal is ordered.

Since buyer's finance this fee by rolling it into the loan amount, this will not increase the cash required for settlement.

Examples:

Current Scenario
300,000 loan amount + $5,250 funding fee = $305,250 total loan. Monthly payment $1,638

Scenario Effective April 5th
300,000 loan amount + $6,750 funding fee = $306,750 total loan. Monthly payment $1,646

The monthly payment went up by $8/month.

Choosing to walk away from a mortgage

The New York Times had a very interesting article a few days ago about homeowners who are able to continue making mortgage payments but walking away (and letting the bank foreclose) now that their home's value has declined. It's a hard statistic to measure, but according to David Streitfeld, "New research suggests that when a home’s value falls below 75 percent of the amount owed on the mortgage, the owner starts to think hard about walking away, even if he or she has the money to keep paying." The article presents a few scenarios as well as what could happen to the fragile economy if many more American homeowners decide to do this. Even more interesting to me were the reader comments debating the ethical and economical repercussions (I read the "highlights" of the reader comments).

One reader wrote in:

"That secured value changes, most contracts state that non-payment will result in foreclosure (they get the asset). It seems to me like the one who made the bad bet is actually the lender, not the house owner.

If I didn't think that the house would recover its value for 5 or 10 years, I'd give the asset back to the lender. Its my contractual right written in there in the contract drafted by the lender. I think everyone in this situation should do this (its what companies do) and it is financially astute to do so in the long run unless, of course, you think that paying 150% of the going asset price (the mortgage you pay as opposed to the rent you would pay) is financially astute!"

Another argues "What's sad is that we have become a lawless society devoid of any consequences no matter how egregious the offense. I'm not saying these people are wrong for walking away, banks would and have reneged on their agreements. But ultimately we all pay, with tax dollars and our integrity."

FHA 5 Year ARMS

I know that ARMS (adjustable rate mortgages) have gotten a bad reputation these past few years, ARMS are often cited in press about the foreclosure situation and unethical predatory lending. That said, some ARMS make a lot of sense for certain buyers. The Prosperity Mortgage's new FHA 5 year ARM rates are 3.75% for the first five years and can go up a max of 1% per year, capping out at 8.75% in the 10th year. So if a homeowner thinks they might be in a property for 5-7 years, their average interest rate over those 7 years is still less than it would be with a 30 year fixed mortgage and they get the benefit of having lower payments in the first few years of ownership. With an ARM (and with any loan) you have to read the fine print to know what you are getting into down the road should plans change and you wind up in the property for longer than 5 years.

HUGE changes coming in FHA loans and spot approval process

Earlier this week I got an e-mail from Ryan Dailey at Prosperity Mortgage regarding the changes coming to FHA loans. Spot approvals are not going away, in fact they are becoming easier in some regards. Lenders that have their own FHA underwriters will be able to streamline the process with in house "Direct Endorsement Lender Review and Approval Process." The change I am most excited about is that the owner occupancy ratio is currently 51% and will be changed to 50%. This doesn't seem like a large change- and isn't in a building of 100 units. But in a four unit building (like my listing 2121 2nd Street) with 2 owners occupants and 2 investor owned units- this makes a great difference! Also projects of more than four units were previously allowed 10% with FHA insurance and the limit will be raised to 30%.

Interest Rates

Breaking News Alert

The New York Times

Wed, September 23, 2009 -- 2:23 PM ET
Fed Will Keep Key Rate Near Zero for 'Extended Period'
The Federal Reserve acknowledged on Wednesday that an economic recovery was under way, but signaled that it was still much too early to start raising interest rates.

In a statement following a two-day meeting by the Fed's policy makers, the central bank repeated that it would keep its benchmark overnight interest rate at virtually zero for "an extended period." That almost certainly means until at least some time in 2010. Policy makers also announced that they would extend the Fed's program to buy up almost $1.5 trillion worth of mortgage-related securities through the end of March.

Rumor Mill Regarding FHA Loans

This has not been confirmed yet but apparently FHA may be stopping the practice of allowing "spot approvals" on condos in buildings that are not FHA approved but fit all of the criteria (such as a sub 50% investor ratio and all owners being current on condo dues). This would be truly awful for the condo market as condos require down payments of 15% for conventional financing. FHA loans have gotten so popular partially because the down payment needed for condos has gotten so high and the first time buyers can't come up with the cash. I just had a spot approval on an FHA loan denied to a client because there was already one FHA deal in the 7-unit building and they wanted to "limit exposure" in any given building, so it doesn't surprise me that the recent popularity of the program has caused them to scale back.

Washington Post's "Lowball Appraisals Spark Uproar"

This article ran in the Post on Saturday regarding low appraisals coming in on new loans and re-fi's all over the country. This is a sensitive topic for me right now as I am dealing with an appraisal that came in low and it's insanely frustrating for my buyer, the seller, the loan officer and the agents involved. I remember sitting in Econ 101 years ago and learning that the value of a commodity is the price at which a seller is willing to sell and a buyer is willing to buy. In real estate we have asking prices, offering prices, price reductions, negotiations galore and sometimes even bidding wars that eventually arrive in a number at which the buyer is willing to buy and the seller is willing to sell. I understand that banks feel like there needs to be a check in place to make sure they don't get stuck with a foreclosed property that is worth less than the amount they have lent. That itself is the reason we are seeing more loans require 10, 15 and 20% down payments rather than the no money down and 5% down payment loans we saw just a few years ago. Adding a third party (the appraiser) into the mix who may or may not know the market or be doing competent research on the "comparables" can derail an otherwise smooth transaction. These appraisers have final say on the "value" even though any econ student will tell you that value cannot be determined by one person alone. When I give a seller a suggested price that is my opinion of what someone might be willing to pay, and an appraisal is just that, an opinion. New laws handed down from Fannie and Freddie stipulate that mortgage lenders and real estate agents cannot contact these appraisers to ask for revisions or explanations of an out of whack appraisal, so options are to negotiate the price down, come up with more cash, or start the process over with a new lender. A lesson for the buyers out there: keep those appraisal contingency's in there!

Lenders Now Requiring Condo Purchasers to Obtain Additional Insurance

From Ryan Dailey at Prosperity Mortgage (a subsidiary of Wells Fargo):
"NEW AND ADDITIONAL INSURANCE REQUIRED FOR ALL (attached) CONDOMINIUM UNITS - The standard coverage provided by the condo association for replacement cost coverage will still be required, however, additional replacement cost "walls in" coverage must be purchased and provided by the borrower. In LIMITED cases, the condo project insurance MAY provide this coverage, but this is likely to be the exception, rather than the rule. Many other Lenders have already instituted this, and many of you have asked if Wells was adding this requirement - they are, effective with all application dates of 7/1."

Lenders used to recommend that condo owners purchase additional insurance and now it is going to be a requirement for most lenders. The coverage is very affordable and a good idea to have anyway!

NAR Press Release About NEW Option with $8,000 Tax Credit

This is fantastic news for first time buyers without a lot of cash (or first time buyers that need their cash to fix up the foreclosed properties!)...

First-Time Home Buyer Tax Credit for Closing will Move Market
WASHINGTON (May 29, 2009) – Consumers across the country can now take advantage of a Federal Housing Administration program to allow qualified home buyers to apply the $8,000 tax credit when purchasing a home. FHA will now permit its lenders to provide a short-term bridge loan that will let qualified home buyers use the tax credit to either make a larger downpayment above the FHA required 3.5 percent, cover closing costs, or buy down their interest rate.
“A true housing recovery depends on buyers returning to the market and reducing inventory,” said National Association of Realtors® President Charles McMillan, a broker with Coldwell Banker Residential Brokerage in Dallas-Fort Worth. “Since many of the homes available are lower priced starter homes, the ability for individuals to use the tax credit at closing should have a meaningful impact on home sales and values and will allow thousands of families to achieve the dream of homeownership.”
Shaun Donovan, secretary of the Department of Housing and Urban Development, announced the change today. In an address to several thousand Realtors® gathered two weeks ago at NAR’s Real Estate Summit: Advancing the U.S. Economy, Donovan announced HUD’s plan to offer the tax credit as downpayment assistance. Donovan detailed the modifications to that original proposal and announcement.
“We all want to enable FHA consumers to access the home buyer tax credit funds when they close on their home loans,” Donovan said. According to Donovan, the FHA’s approved lenders will be permitted to “monetize” the tax credit through short-term bridge loans allowing eligible home buyers to access the funds immediately at the closing table.
NAR has supported monetization of the tax credit, which was part of an Obama administration housing stimulus plan enacted earlier in the year. NAR petitioned HUD to allow home buyers to use the $8,000 tax credit to help them cover downpayment or closing costs to bring new home buyers to the market and stimulate home sales.
“We think this is a good program; our members have been getting many inquiries from potential buyers about it,” McMillan said. “NAR is pleased that this enhancement has been made to the administration’s housing recovery program. As we have heard before, there can be no economic recovery without a housing recovery. With an abundance of inventory, reduced home prices, historically low interest rates and now the availability of the tax credit at closing, we expect to see the housing market further stabilize and improve.”

Wells Fargo Has Jumbo Loans Available.

This was sent out from Ryan Dailey at Prosperity Mortgage:

Wells Fargo will now allow the following LTV's for loan amounts up to $1.5MM:



75% with a 720 credit score and 10% Post Closing Liquidity

80% with a 740 credit score and 40% Post Closing Liquidity



This means that a purchaser buying with 25% down, would need an additional 10% in reserves and a purchaser buying with 20% down, would need an additional 40% in reserves. It is very important to note, that Post Closing Liquidity or "Reserves" do NOT count retirement funds.



While this is a dramatic improvement from the previous 30% required down payment, a buyer eligible for these expanded LTVs will have to document significant non-retirement assets. The assets can include savings, investments, CDs, money market accounts, trust assets, etc. - assets that a lot of people may not want to liquidate right now, especially in this market.



This is the first "loosening" we've seen with Jumbo money, which is a great sign. Since jumbo money comes directly from the bank's balance sheet, this loosening is very telling about Wells Fargo's liquidity and appetite for risk.



So with these expanded LTV's, buyers can find, and sellers can market, financing for homes up to $2MM with 20-25% down - a definite improvement! And the jumbo rates have gradually become quite attractive --



6% for a 30 year fixed and 4.875% for a 5 year ARM.

Attention Renovators...KEEP ALL INVOICES/RECIEPTS

The financing situation right now is interesting because while rates are amazingly low, the underwriters are being terribly picky and issues are coming up that surprise even the most experienced lenders! My deal at 1330 New Hampshire is moving along toward settlement, but the seller, who is also the listing agent, bought the property and renovated it, causing a great jump in its value. This is a "red flag" for the underwriters and they have asked him to dig up his invoices and receipts for the work he's done. I advise anyone reading this to keep a file of all the work you are doing on your house, in case it ever is needed at the 11th hour when you go to sell. This advice is especially important for the investors out there who are buying foreclosed properties and fixing them up.

DC Has New FHA Loan Limit!!

Great News...FHA has just increased the loan limit to $729,950! With a 3.5% down payment you can purchase houses or condos up to $756,000.

HPAP Is Back!

http://newsroom.dc.gov/show.aspx/agency/dhcd/section/2/release/15949

The Department of Housing and Community Development has reinstated the Housing Purchase Assistance Program! This is great news for the buyers who were counting on HPAP in order to recieve financing.

John Allison, CEO of BB&T Speaks Out

Last night I attended a lecture given by John Allison, the CEO of BB&T, about the current financial crisis. Allison is a rare breed today; there are few CEOs who have run financial institutions, successfully, for almost 30 years. He spoke out against the government intervention, which in Allison's view, got us into the financial crisis. The recent bailouts have helped failing institutions who have made terrible decisions and, in the process, hurt stable banks by imposing on them new regulations (such as accounting rule changes that hurt BB&Ts ability to make loans that make economic sense but would look bad on the new accounting sheets). He also said that the Fed is publicly stating that they are encouraging banks to give loans, and then the local regulators are giving banks a very different story. One of the more memorable lines of his talk was that the US is not heading toward socialism, but fascism. The government doesn't want to own the banks, they just want to have control over all of the banks. His view is obviously in the minority right now, especially when many other bank leaders are crying out for more help and more money from the government. I suggest looking at his letter to Congress.

Good News and Bad News About Interest Rates

Interest rates are the lowest they have been in a LONG TIME. Prosperity Mortgage has 30 year conforming money at 5.125% with no points. This is value based pricing, so it applies to credit scores of 740-800. FHA rates, which are the same regardless of credit score, are at 5.5% with one point. On the jumbo side, rates are 5.375% with a 5 year ARM and 6.5% with one point for a 30 year fixed rate.

Ryan Dailey at Prosperity Mortgage told our office this morning at the sales meeting that people who purchased only a month ago are refinancing. Also, if you want to refinance, they can lock in your re-fi rate for 60 days and then you can take advantage if the rates go even lower!

For those out there who have heard the rumors about 4.5% interest...it's probably not the best idea to wait. If that does happen, there will be several factors in play. First, the 4.5% rate will only apply to loans under 417k and borrowers who have near perfect credit scores. Secondly, if rates go down like that, there will be many other buyers entering the market and the inventory will go down and prices will go up. Its better to buy now while prices are low and inventory is high and then if rates suddenly drop you can always refinance.

Now for the bad news: the underwriting guidelines handed down from Freddie and Fannie are getting much stricter. We are seeing loans fall through on something that comes back on the condo questionnaire, purchasers who can't get their former landlords to verify rent payments (or the landlords won't return the lenders' calls- another reason to be nice to your landlord!), and the whole process is requiring a lot more paperwork and time. Buyers are shopping around for the "best rate" and applying with lenders who then fall through right before settlement because something was not completed correctly. What you can do as a buyer to combat this: leave in that long financing contingency, and go with a reputable lender!

Lower Interest Rates- What Does It Mean For My Payment?

Interest rates have gone down!! For conforming money, the rates were 6.375% two weeks ago and they are now around 5.375%. Let's take a look at what that means in terms of your monthly payment

Loan Amount: $250,000 monthly savings: $160

Loan Amount: $400,000 monthly savings: $256

Loan Amount: $600,000 monthly savings: $383

Those savings add up to quite a bit over a 30 year loan. Right now prices are low AND rates are low, there is no better time to purchase a home. Don't rely on online mortgage calculators, call a lender and figure out what your loan options are.

DC Suspends Housing Purchase Assistance Program (HPAP)

In a reaction to the city's budget shortfalls, the DC council voted to suspend the HPAP program and not renew funding for 2009. This has caused a huge upheaval in the lower tier of DC's housing market. If we have learned anything from the recent bank failings and whatnot it's that when one sector fails, it doesn't take long for that to reverberate to the rest of the economy. In my opinion, if DC wants to stop the Housing Purchase Assistance Program, they need to first fund the loans for people who have been approved and have ratified sales contracts. Many contracts will fall through for low-income purchasers who would not qualify for the loan of the purchase price (HPAP kicks in up to 70,000 as a 5 year interest free loan), which will just hurt that sector of the market (usually houses up to 300,000)and lead to more foreclosures and short sales. On the website http://buildingdc.com/petition (click to sign the petition and learn more) they have quotes from people weighing in on this budget cut. I found the following quote particularly informative:

Agent - “I have a client that has given notice to her landlord that she and her daughter will move out to in order to settle next week. They will be homeless if the City does not honor its contractual obligation to keep their word and fund her loan.
These prospective homeowners will add to the City’s revenues not subtract. The City will receive transfer and recordation tax revenue for each settled transaction and will ultimately receive property tax revenue, not to mention sales tax revenue when these homeowners go to Home Depot and other retailers.
This cannot be what the Council intended. The Council needs to understand that HPAP is funded in arrears and not in advance. Whenever it receives funding from DHCD that money goes toward reimbursing expenses from the previous quarter. This is a huge mistake and will ruin Thanksgiving and Christmas for countless families, not to mention pull the bottom out of the real estate market.” -D

Make Less Than $99,000? Take Advantage of DC Bond Loans

Yesterday I went to a course about the DC Bond program, and learned more details about DC's initiatives to enable homeowners. I've blogged before about HPAP (Housing Purchase Assistance Program) which is for low income buyers, and this can be used in conjunction with HPAP but has higher income levels. First time home buyers who make less than 99k/year (200k for couple) can purchase anywhere in DC at a great rate and the DC Bond Program grants the down payment of 3% that FHA requires. If you make over 100k a year you can purchase with the DC Bond Program only in the targeted areas (lower income neighborhoods). You would get the loan through a participating lender (Prosperity Mortgage, for example) and then write a contract where the seller pays all closing costs up to 6% of the purchase price. The DC Bond loan with down payment granted has a rate of 6.27% with 2 points so closing costs would be around 5%, and this can all be paid for by the seller. After Jan 1, 2009 the FHA down payment goes from 3% to 3.5% so borrowers would have to come up with .5% of the price of their property which is much more do-able than 3.5%! Contact me or Ryan Dailey at Prosperity Mortgage (202) 363-1800 for more details or to pre-qualify for a loan.