Coastal Real Estate and Lifestyles

Just in from Susan O’Driscoll, our Half Moon Bay office in-house lender, Princeton Capital…

**Rates for our agency jumbos are down! Loan amounts > $417,000 – $729,750 today on a 30 year fixed are 6% - 0 points or 5.75% with 1 point.**

Shortly before Susan’s email, I got a call from HMB Branch of Bank of America’s Bob Zimmer with his update.  I hadn’t gotten to my newsfeed in the last few days to see for myself the Fannie Mae announcement.  Thanks guys for keeping the telephone tree alive and well so that we and our buyer clients can be the first to know about changes that may affect their rates! 

Their news to me coincides with Wednesday’s announcement by Fannie Mae, summarized here by an NAR press release that Fannie is…

“…working to reduce the cost to consumers of jumbo conforming loans (loans above $417,000, up to $729,750 in some areas) and make it easier for individuals and families to qualify for these loans. We expect this step will lower mortgage costs for many families living in high-cost areas. Additionally, Fannie Mae will allow many borrowers to refinance Fannie Mae-owned mortgages even where a home’s current value is significantly less than the existing mortgage.”

“Agency jumbo” is the another term for “jumbo conforming”, the recently approved loan limit increase for high cost areas.  I know, we really don’t need more industry lingo, do we?

Related reading:

Fannie Mae Quarter 1 News Release

Are you watching for opportunities?  In my opinion, those willing to put in some sweat equity on less than move-in-ready homes could reap rewards if planning to keep the property for at least 5 years.  The new loan options that will ease borrowing for a home purchase in our area may allow some to get into the market that previously thought they could not due to perhaps high prices, less than perfect credit, demand, etc.  This update of the Economic Stimulus Package of 2008, in a nutshell is as follows:

1. The limit was increased for the amount of FHA-backed loans.  The Federal Home Administration offers an insurance product.  FHA loans took a back seat to the subprime loan products of the early 2000’s for borrowers with minimal down payments, partly because the limit was so low and partly because there was an extra fee for the insurance.   FHA loans, up until now, had a low maximum allowable insured limits, severely limiting its usefulness in high priced markets such as ours.  However, this increase to $729,500 is a substantial jump and is available - currently - until 12/31/08.  This is meant to ease the worries of investors by attempting to reduce the risk of loans with government security.  Not all mortgage brokers can offer FHA loans.  Ask your preferred Mortgage Broker if they are approved to do FHA loans.  Our in-house lender, Princeton Capital representative Susan O’Driscoll, can offer them and gave me a list of several key points for those who may consider an FHA backed loan.  A few highlights:

• OK for any buyer, not just first time buyers.

• Princeton can underwrite, draw the documents, and fund the loan.

• FHA does not count 401K loans in debt ratios.

• NOT FICO (credit score) driven.

• FHA loans are assumable to qualified buyers.

• Owner occupied only and moves into the home within 60 days.

• 100% gift allowed for down-payment and closing costs.

2. Fannie Mae and Freddie Mac loans (known as “conforming loans” with a limit of $417K) now have a temporary increased limit of $729,000 in San Mateo County, including other California counties.  Other County limits may be different.  Up until now, borrowers were looking at getting a First and a Second (Seconds meaning Jumbo loans) to get into homes here unless they were move-up buyers with a lot of equity for a large down payment.  This article from Forbes sums it up and gives figures on which markets will be “…the biggest real estate winners”…

“It also reduces consumer interest rates. Loans above Fannie and Freddie’s limit are known as “jumbo” loans, and because they aren’t backed by the government, these riskier loans carry higher interest rates. Under the limit increase in the stimulus package, loans that are recategorized from jumbos to conforming loans (54% in San Jose, 44% in San Francisco, 17% in New York) will carry lower interest rates. For potential buyers, this makes home buying more affordable…”

As an aside, I have to say that I couldn’t help but think about the Forbes article Title using the word “winners” in it.  Where there are winners, there are also losers.  We know who the losers are and this reality saddens me.  Those who left insufficient funds in their property-bank, or those who took a risk with one of the negative amortization or other ill-fitting loans - didn’t project the loan’s affordability as it adjusted and now find that they can’t afford those monthly payments -are feeling loss right now.

For more detail and to discuss our situation and options, call your preferred mortgage consultant or Susan O’Driscoll (see her link in my blogroll under Mortgage) to see if you are able to move forward with your home purchase plans.  This program, in combination with a good inventory (remember, inventory is higher than last year as shown in an earlier post) for buyers that we haven’t seen in a long time will create a perfect storm for some who choose to make the call to their preferred lending, real estate, and financial consultants.

The multi-billion-dollar Economic Stimulous package, Bill HR 5140, that we’ve been hearing about was signed yesterday.  Home loans previously offered through Fannie Mae and Freddie Mac (conforming loans) and Federal Housing Administration (FHA) loans will have an increased secure limit for a short period of time.  The limit will increase to up to 125% of the median home price in a given county or metropolitan statistical area.  I don’t know yet if the limit will be based on annual, quarterly or monthly data, but here are Half Moon Bay’s median prices.  (Annual 2007 - $957K; Q4 2007 - $915K; Month Jan. 2008 - $1,250K.  The temporary limits are set to expire on December 31, 2008.

If you are a San Mateo County Coastal area Buyer or Seller:

Buyers:

• Start getting your financial house in order** and talk with a mortgage professional.  It’s your turn, but don’t expect any bargains in the Half Moon Bay area.

• After you talk with a mortgage professional you can look at properties with a new “eye” toward what you can afford under the new guidelines and loan limits.

• There is more available inventory now than a year ago (up 28% currently) so there are choices; however, some properties buck the trend and sell very quickly; some still never make it to the MLS.  It’s very neighborhood/location specific.  Pacifica has lots of great inventory to choose from right now if you’re considering neighborhoods there.

Sellers:

• If already in a listing contract, discuss these changes with your Realtor(r) and how they will affect your situation.

• If thinking of selling, contact 2-3 agents to discuss your needs and get brought up to date.

• We’re still in a Buyer’s Market and with lots of changes in the works; get yourself positioned to achieve your goals by staying aware of market shifts and taking your Realtor’s(r) advice.  These market shifts happen before they become headline news.

More detail about how this announcement may affect buyers and sellers in the San Francisco Bay Area in my Hot Topic.

**
Do you know your credit score?  700 is the new 680 per my mortgage contacts.
If you’re thinking about purchasing a large item with a credit card, it may be prudent to wait.
Have you looked at your credit report in the last 12 months to see if there are errors?

A little greeting…

Roses are Red
Our Ocean is Blue
Happy Valentine’s Day
From Me to You

This just in from Half Moon Bay office of Princeton Capital Mortgage consultant, Susan O’Driscoll:

Countrywide:
No longer doing any 2nd mortgages that are not combined with their 1st mortgages.
It used to be that you could get a 1st mortgage from Wells Fargo (for example) & 2nd mortgage from Countrywide.  No more.  The only time Countrywide will issue a 2nd mortgage is if they are doing the 1st, at the time of purchase. They will no longer do HELOC’s as stand alone transactions.  Note:  I have a client with a $850,000 HELOC with Countrywide. They have a $40,000 balance at the moment. Countrywide wrote them a letter to inform them that are cancelling the HELOC.  No discussions, no modifications, just closing it.  Borrower will be allowed to pay back the $40k over 30 years.  Expect to see a lot more of this with equity lines either as part of a purchase or as loans after close of escrow.  Also, please keep in mind that it will become harder to obtain an equity line after buying a home.  So, for those folks who are considering a large downpayment and then intend to get the money back (for repairs, or whatever) via an equity line, be aware of this in your planning.

Chase:
Chase will now only allow up to maximum 75% loan-to-value of the property.

Wells Fargo:
The same applies to Wells Fargo with respect to their 2nd mortgages as described above with Countrywide.

I guess the thrust of all this is Mortgage Insurance may be making a comeback.

MB’s 2 cents…Bottom line is work with a mortgage professional you know or a trusted referral and ask questions to understand your product.  We are fortunate to have several excellent professionals here on the Coast.  I also work with Ed Diaz (spanish/english) and Sam Siew (chinese/english).  The mortgage industry is continuing to work through needed changes.  Even with these changes, you might be able to get into your first or dream home sooner than you thought.

With the possibility of a temporary raise to the conforming loan limit for markets such as the San Francisco Bay Area, there is lively discussion here in the blogosphere about how this may alter our local trends.   Here’s a look at median price graphs for the last 90 days closed sales for Half Moon Bay, El Granada, Moss Beach, Montara and Pacifica.  Ninety days is a relatively short period of time in a slower market; for more graph detail of market indicators spanning the last 360 days, including quartile markets and other cities, visit my Local Stats page.

HMB 90 day activity: 12 closed sales ranging from $645-$1,865K.

EG 90 day activity:  3 closed sales ranging from $720-$865K.

MB 90 day activity:  2 closed sales ranging from $620-$833K.

Montara 90 day activity:  4 closed sales ranging from $740-$1,845K.

Pacifica 90 day activity:  25 closed sales ranging from $449-$1,450K.

Blog mentor and friend Kevin Boer, 3 Oceans Real Estate, gives a detailed scenario of how this could change our monthly cash flow…

Will the financial markets return to normal any time soon?  Remember when we said that it couldn’t be all that bad if the government wasn’t involved.  Well, that changed and they’re definitely involved now…holding a great big spoon.

The overall stimulus package includes temporary support for raising the conforming loan limit for Fannie Mae and Freddie Mac programs beyond the current $417,000 to $625,000 for higher cost areas such as the San Francisco Bay Area.  Also the Federal Housing Administration (FHA) would be able to insure loans up to $725,000 from the current $362,000 ceiling.

According to a Forbes.com article today…“‘Because the country needs this boost to the economy now, I urge the House and the Senate to enact this economic growth agreement into law as soon as possible,’ Bush said.”

I expect this could have an affect on the local real estate market in 2008 since these dramatic actions are designed to stimulate the economy back into action.  Many borrowers here rely on jumbo loans, where the median price for a single family home was $936,000 for San Mateo County in 2007.  However, I’m really not sure if it’s a well-designed plan (hmmm, I can’t believe I even wrote that) or a knee-jerk reaction fueled by political pressures.  Something needs to happen, but is reducing the Fed Funds rate by another 0.75 percentage point and increasing the conforming loan limit at the same time a good thing in the long run?  Why do I keep thinking back to 2001?

This development has caught the attention of two other local Realtors, who also share their take on this emerging topic:

1. Arn Cenedella, a Realtor with Coldwell Banker in Menlo Park highlights how much can be saved each month for a typical borrower.
2. Dave Blockhus, a Realtor with Coldwell Banker in Los Altos points to the the fact that the down-payment will still be an issue for many.

Rates have taken center stage in the real estate buying and selling process for the last 6 months…and I don’t think it’s going to end any time soon.  A complex issue such as this that involves several facets of the financial markets will certainly take some time to sort out - all while there are folks out there who need to be buying and selling their properties. 

Countrywide was the darling of home purchase lending in the early 2000’s.  I know many people who have used Countrywide.  Unfortunately their business plan did not allow for a timely market correction.  If anyone should have been watching the markets from the investor perspective it would be Countrywide’s execs; otherwise they wouldn’t be in this mess.  When the market shifts new opportunities are created…

“There are near-term challenges, but where there are challenges, there are always opportunities,'’ Lewis said during a conference call today. “We view this as a one-time opportunity.'’

It seemed likely a buyout would happen when Bank of America loaned Countrywide $2 Billion a few months ago.  Now that it has happened, will it change the face of local real estate?

The positive is that changes are happening in the lending industry to stabilize things - and that is a very good and much needed process to happen - quickly!  Is there a negative to this move for consumers?  I guess I would be reading my mail much more carefully if I had a Countrywide loan.  On a more micro level, it probably won’t change much because we have always had B of A products available through our local reps, such as Bob Zimmer of Bank of America and through Mortgage Broker, Susan O’Driscoll of Princeton Capital.  But B of A’s primary business is not mortgage lending, it is banking.  Are they continuing to move the chess pieces toward an entire business model shift?  How will this affect another solid giant, Wells Fargo?  Ask Bill Griffis, our local WF rep yourself…

The specifics that HAVE changed here - and elsewere - is lending criteria.  “…Mortgages to people with weak credit contributed to a surge in defaults last year…”  also from the Bloomberg.com article.  More on CREDIT in my current Hot Topic article. 

For consumers about to talk with a Mortgage Broker or direct lender:

• Know how long you plan to be in the property you are purchasing
• Have at least a quick idea of your credit scenario before meeting with a lending professional
• Do NOT be afraid to ask questions and get a satisfactory answer
• It’s okay to talk with more than one mortgage professional and interview until you feel comfortable
• Know that there are good loan products out there and people are still buying and selling homes

Two bills are in process that will alter the real estate loan business - if passed…

Cancellation of Mortgage Debt - HR 3648 - Rengal bill

This updated bill would make it easier for a home seller to close on their home for less than the loan amount due.  It would take at least one nail out of the coffin of the homeowner faced with possible foreclosure.  Currently, if faced with having to sell his house for a loss, a homeowner is required to pay income tax on the difference.  There is an effort to get this bill passed before the end of this year and proposals to have it be retroactive to January 1, 2007.  Here’s an example from NAR’s website-Cancellation of Mortgage Debt Q&A:

“Assume a family purchased their home for $100,000, with a mortgage of $95,000. Later, they need to sell the home. They find that the value of homes in their area has declined and they can sell for only $89,000. At the time of the sale, the outstanding balance on a mortgage might be, for example, $92,000. Thus, there will not be enough cash at settlement to repay the lender the full balance of the mortgage. In some limited circumstances, a lender might forgive the amount of the balance that exceeds the purchase price ($3,000 in this example). “

For homeowners in our area, of course the numbers are much larger.  Those most affected in our area will be 1) established homeowners who over-refinanced and are now forced to sell due to unforeseen circumstances; 2) first time homebuyers who got into the market with a teaser loan, try but can’t continue to make payments at the higher rate and need to sell to get out from under the escalating debt; 3) those who used equity to purchase a second home, either here or somewhere else and need to sell.  None of us plan for a job loss, divorce, job transfer, or a medical emergency.  We may have the “Emergency Fund” to get us through 3-6 months, but in some of these cases it won’t be enough.  If a homeowner finds himself in this situation, he may find that either he can’t list the home to be competitive and cover the debt, or it’s not in his best interest to accept a lower offer price because of the tax consequences.  If the seller is able to complete the sale (the lender has agreed to accept less than the total loan amount), the seller is faced with having to declare that difference as taxable income.  The lender would provide the homeowner with a Form 1099.  This bill was originally proposed several years ago and has gone through several drafts. 

Mortgage Reform and Anti-Predatory Lending Act of 2007 - HR 3915 - Frank bill

This new bill is designed to reduce predatory lending practices and put in place greater accountability measures in the mortgage industry for consumer protection.  While on the surface it appears like a no brainer, there are such strong feelings on both sides of the fence that this bill clearly warrants further investigation.  This bill proposes: (my opinion/thoughts as of today will be next to each point.)

• A nationwide mortgage licensing system and registry; (seems like a good idea.)
• Prelicensing education from approved courses; passing a test that would be developed by the national registry; license renewal guidelines; (education and testing is good, but testing by the same organization that licenses?)
• To amend the Truth in Lending Act by inserting “anti steering” wording including the elimination of incentives in certain circumstances and yield spread premiums (YSP); (what impact would there be to eliminate ysp’s?  are ysp’s as bad as this bill makes them sound?  how much are they abused?)
• To amend the Truth in Lending Act by inserting a “defense to foreclosure” clause for the consumer against a judicial or non-judicial foreclosure attempt by the mortgage holder; (where’s the layman’s interpretation?)
• Require disclosures that specify current and future payment amounts for variable rate loans; (seems obvious)
• Prohibiting credit extension without regard to payment ability of the consumer.  Here is exact wording from the bill - this is important — “A creditor may not extend credit to a consumer under a high-cost mortgage unless a reasonable creditor would believe at the time the mortgage is closed that the consumer or consumers that are residing or will reside in the residence subject to the mortgage will be able to make the scheduled payments associated with the mortgage, based upon a consideration of current and expected income, current obligations, employment status, and other financial resources, other than equity in the residence.” (Section 302.2a) (this seems like a black hole - with wording like ‘reasonable’ and ‘believe’ and ‘consideration’; more research required)

To hear the actual testimony from Congressman Frank on this bill proposal, click here.  Thanks to the InmanBlog reference dated 11/2/07.  To view the 10/22/07 Press Release from the House Committee on Financial Services with links to the Bill and a section by section summary, click here.

I do believe the mortgage industry needs changes; I don’t yet know if this Bill as it currently is written accomplishes that.  I feel we are moving in the right direction, I just want to understand this more before I weigh in with more persuasive opinions.  We need more facts on the short and long term consequences of these proposals.  Homeowners need to understand these terms and then contact our local representatives.  I am interested to know what you think.

11/16/07 update:  House of Representatives approved this Bill with some modifications with a 291-127 vote.  Other modifications are in progress.  Contact your congressman to share your views while politicians work to refine the final wording.

 Resources:

Federal Reserve Education website
Thomas

As we begin to digest this week’s news of the half percent Fed Funds rate cut… Now what? 

On Tuesday afternoon, when I asked my Manager, Robert Ross, what he thought of the Fed reducing the funds rate, he said, “it probably won’t affect our area too much.”  Why, because we are San Mateo County, a bedroom community of tech-capital Silicon Valley, one of the wealthiest areas in the country.  “Home sales are less affected by interest rate fluctuations here.”  I won’t know the real reason without further analysis, but I would speculate that available assets to contribute to downpayments enables many of our buyers to obtain very good loan programs.  The chart data, provided by Mortgage Consultants Ed Diaz and Jim Gallup shows the correlation between conforming interest rates and the NASDAQ.  When local stocks are healthy more cash is available. 

The Fed Funds rate (interest rate charges between banks) does not directly affect mortgage interest rates.  It does affect home equity lines.   The Fed’s interest rate cut will have the effect of diminishing fear and panic at the investor level, which will ease the liquidity, and cause larger amounts of money to begin flowing again soon.  What does this mean for you as a home buyer or seller now?

Home sellers - You may get a few more buyers back in the market, more due to confidence than any additional money.  The Freddie Mac or Fannie Mae conforming loans were never affected by our current mortgage situation; the jumbo loans will come back into the market once the the money flow has loosened a bit.  Experts I have asked in the last few weeks say it should take until at least mid November before more jumbo products are available again. 

Home buyers - Mortgage interest rates are tied to Bond market, not the Fed Funds rate.  Also, lending standards have tightened since early August.  Talk to your TRUSTED mortgage professional about your options.  Each buyer’s situation is unique.  Depending on where you are in the buying process and your timing, your mortgage professional will be able to explain what may be coming down the pike that you can prepare for following the Fed’s actions this week.

Sources and a couple articles of interest (tons of reading out there):

• Federal Reserve System website
• Gary Watts, Real Estate Economist (presentation on 9/20/07) - Email me for 8 page report
• Chicago Tribune, 9/21/07
• Business Week - “Vital Signs…” 9/20/07
• Jim Gallup, Mortgage Professional, MadysenAve.com
• Ed Diaz, Mortgage Professional, P-Shift Mortgage Solutions
• Susan O’Driscoll, Mortgage Professional, Princeton Capital

Even I get overwhelmed with all the various articles on “the mortgage meltdown”, I can only imagine how someone not in the business must feel these days.  So I finally decided to ask my mortgage contacts face-to-face what is going on right now, so that buyers and sellers have accurate information. My email inbox has been getting filled lately from mortgage brokers telling me that they are still writing loans – but what the heck does that mean?  We want the facts, thank you very much… so here’s the low down on what local mortgage contacts are telling me today.

Susan O’Driscoll, Princeton Capital confirms that lender guidelines are changing almost daily.  She just showed me today’s update regarding lenders IndyMac, LandAmerica Financial, CIT, and Homecomings Financial.  In yesterday’s memo titled “The good news…”, Susan lists the loans that are available.  Compared to a few months ago, the packaging may be different; guidelines more stringent.  Some lenders may require higher FICO scores now; some may agree to the same loan but with “full documentation” instead of “stated income” only. The loans that were popular for a few years - the 100% financing with stated income, stated assets - has taken an extended vacation.  Coldwell Banker is affiliated with Princeton Capital, and local rep Susan O’Driscoll is a wonderfully knowledgeable and handy resource!

Bank of America’s Bobby Zimmer says, San Mateo County has spiked recently in foreclosures, but is still low compared to other California regions.   He reports, the biggest difference for local buyers who may be faced with a median home price of a million dollars is the limited supply of Jumbo (nonconforming) loans now available.    Bank of America is definitely writing them.  When a bank does not have to rely on the secondary market for funding AND has its own underwriting, the internal accountability is in place.  Conforming loans (under $417K) are more easily written – in part because of the backing of Fannie Mae and Freddie Mac.

A Princeton Capital report also notes that analysts estimate 60% of small mortgage brokers that existed in 2006 will vanish.  Bobby at Bank of America agrees that many small brokers that he knows are looking for a job.  There are highly professional and knowledgeable mortgage representatives and lenders out there, but you have to do your homework.

Latest update:  I did not get feedback from Countrywide in time for this blog.  So I’ll either do a follow up or we will hear from Countrywide directly in a comment.  If any other mortgage professional wants to make a useful contribution here for buyers and sellers, please do.