In a previous post, we talked about our concerns regarding the number of families in 2010 that were going to have their Option ARM mortgages resetting or recasting. The term ‘reset’ deals with the change of interest rate. The term ‘recast’ deals with the actual change in the mortgage amount. In either case their mortgage payment could be affected.  And at a time of tremendous financial hardship, many families’ mortgage payments could increase… some of them rather dramatically.

Why will this be a challenge in 2010?

We only have to look at the chart below to see that many loans will be impacted over this year and next:

This will be an ongoing concern in 2010.  SNL reported recently a quote from Greg McBride, senior financial analyst at Bankrate.com:

“The avoidable scenario is interest rates start to go up over the next couple of years, and all of a sudden, millions of homeowners who are stuck in adjustable rate mortgages and haven’t been able to refinance out of them become sitting ducks for big payment increases. And then here we go again. It’s like 2007 all over again.”

Will this be a challenge in my state?

Here is a graph showing the percentage of Option ARMs in each state. The darker blue your state is the higher the percentage.

What does this mean to you?

Again we are talking about an increased number of people who will have difficulty paying their mortgage. That will lead to an increase in housing industry as these families are either forced to sell or lose their home to the bank. Any increase in housing inventory will have an impact on pricing.

One of the biggest challenges to a housing recovery is the current rate of unemployment. It is obvious that a person without a job can’t get a mortgage. An additional impact is that many people who are currently employed are afraid to commit to buying a home because of the uncertainty of the job they do have.

It is easy to understand their concern when you read the Bureau of Labor Statistics news release on 2009 unemployment which was released March 3. In the report, it was stated:

All 50 states and the District of Columbia posted statistically significant unemployment rate increases in 2009.

If we look at the unemployment rate by county over the last four years, we see a very unsettling story. Below is a visual depiction of the increase. The darker the area the higher the unemployment rate.

How does this compare to previous times of high unemployment?

Below is a graph from Calculated Risk showing the percentage of job loses compared to challenging times of the past:

When can we expect things to get better?

IHS Global Insight just came out with their perspective:

As for the unemployment rate, it is encouraging that there was no setback in February. This improves the odds that last November’s 10.1% level will prove to be the peak, and that unemployment can edge down a little further by the end of this year. But we continue to believe that progress in bringing down unemployment will be slow, as previously discouraged workers return to swell the labor force.

What does this mean to you?

It could be difficult to sell your house if you live in an area of job instability. If you must sell, you may have to make the price so compelling that the buyer is more concerned about losing the opportunity to purchase it then they are worried about the chance they may lose their job.

Whenever you are selling anything, it helps to have an idea what your customer is thinking. I had the opportunity to attend a session at the Luxury Portfolio Summit in Las Vegas which covered the findings of the Survey of Affluence and Wealth in America 2010 produced by American Express Publishing and the Harrison Group. Below are the highlights of the report which we received in the program for the event.

If you are selling a home in the upper price ranges in your region, you should find the following statistics rather interesting.

How do the wealthy feel?

• 70% still say their economic security has been affected and one-quarter are worried about losing their job or company.
• Confidence in political and business leaders remains very low.
• The savings bubble persists.
• Desire for “value” and budgeting are mantras, but NOT at the expense of quality.

What about the economy?

• 93% say the country is still in a recession.
• 60% feel the recession will last at least another year.

Are the wealthy ready to start purchasing again?

• There are positive signs that wealthy consumers are ready to re-engage in the marketplace, including luxury and high-end.
• When they do, they will not be the same customers as pre-recession…today’s engaged consumer are now more self-sufficient and are practicing due-diligence.
• Most were raised middle-class and the economy has reinforced the values of saving money and spending wisely they were brought up with.
• People are being selective in how they re-emerge in the marketplace.  There is no “all in”.

What will be the impact on the real estate market?

• 72% view real estate as an opportunity and over half (54%) agree that the real estate market will bounce back soon.
• 19% say they are “in the market” to acquire real estate (35% of the wealthiest consumers).
• 42% private homes/30% vacation homes
• Location trumps price.
• The relative importance of luxury amenities has declined…quality of the home is the key.
• Not stepping down in quality, but may be stepping down in size.
• Many will start to look only after doing research.

What does this mean to you?

Today’s luxury buyer will not get caught up in over-the-top indulgence as buyers of the past decade had. They see the home as a sanctuary where they can enjoy the company of friends and family not a trophy to brag about. They want value but won’t overpay for it. Prices must be reasonable.

There has been an improvement in the interest rates available for Jumbo Mortgages, and that is encouraging news.  In addition, some lenders are even lowering the amount of down payment required in the Jumbo loan programs- which is even more good news.

Let’s begin with some basics.

Jumbo mortgages are those mortgages which exceed the Fannie Mae/Freddie Mac acceptable loan amounts (referred to as conforming loan amounts).  Those thresholds are determined annually on a county-by-county basis based on average sales prices of homes and the number of units in the home.  Where I come from (Long Island, NY) is considered a “high-cost area”, which allows us to close Conforming Loans on a one-family home up to $729,750.  Any mortgage, above that $729,750 limit, is classified as Jumbo.

Now let’s talk a little history.

There was a time in the Mortgage World that we refer to as “B.S.” (Before Subprime).  In that world, there was a .25% to .375% higher interest rate on Jumbo Mortgages.  That additional rate was the result of two factors- risk and supply.

First, let’s address risk.

Mortgages are bundled and pooled into Mortgage Backed Securities.  If there are two pools of $10,000,000, and one pool has fifty $200,000 mortgages, and the other has ten $1,000,000 mortgages, and ONE loan defaults in each pool, then the damage to the performance of the pool is more dramatic on the Jumbo pool.  More risk, higher price.

Second, let’s look at supply.

By supply, I am not talking about the number of loans….rather, I am talking about the supply of purchasers of mortgages.  By eliminating Fannie Mae and Freddie Mac as buyers of these Jumbo Loans, Jumbo MBSs lose the biggest purchaser of mortgages in the world and are forced to provide higher yields (through higher rates) to attract other buyers.

Back to the history lesson.

One result of the Subprime Mess was the exodus of buyers in the MBS World.  Mortgages, which had always been seen as high-quality, low-risk vehicles for investment, were suddenly viewed as unstable.  Those non-Fannie Mae/Freddie Mac purchasers of mortgages ran for the hills.  There was no ability for the government to jump in and keep rates low (as there was in the conforming side).  So the yields for Jumbo MBSs were pushed higher while conforming loans were pushed lower.  The result was a change in spread between Conforming and Jumbo loans from .25% or .375% up to 1.7%…..in addition, down payment requirements became more stringent.

We had very qualified (excellent credit, good income, strong reserves) borrowers who were looking at rates over 7%, while seemingly weaker borrowers were closing their loans around 5%.  The higher cost was not attributable to more risk, but solely to few buyers of the Jumbo MBSs.

But time heals all wounds.

Today

Jumbo rates have worked their way down some (and conforming loans have moved up some), and the spread is a somewhat more reasonable .75% to 1% (and less required money down).  Lower rates make homes with those high loan balances more desirous.

This is not to say lending requirements have eased across the board for Jumbos; borrowers still need excellent income, assets and credit to qualify, but it is a bit of a silver lining and something that we can point to with some optimism.

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Dean Hartman is Chief Planning Officer at Continental Home Loans and a 25 year veteran of the mortgage banking industry. He has achieved the designation of Certified Mortgage Planning Specialist, and also specializes in sales leadership, seminar presenting, and team building.

We all know that if you want to keep current on what’s going on in anything, you need to stay on top of what is being published by the people in that field.  That is why every weekend we bring together all the articles (from a myriad of sources) together in order to keep people current on the real estate market.  We’ve also broken down our articles into categories so that you can more easily find specific topics you are looking for!

Below are 27 real estate articles (not including our own) from the past week to help you navigate this complex market.  So grab a seat, scroll down a little bit, and start reading some of the articles that are most appealing to you!  (We’ve even provided you with a reading buddy to keep you company.)  Enjoy!

ARM Resets

Great information on ARM resets with a graph

Foreclosures

Maybe You Should Just Give the House Back

Proof that Real Estate research can be difficult

Proof Banks Don’t Want Vacant Houses

For the Daring Investor

Housing Market

Housing and jobs: some sobering numbers

The Relationship Between Consumer Sentiment and Home Prices

Nab a Deal in Housing

Not Much Impact from Repeat Buyer Credit

Should Fed Continue to Support the Market? Some Say NO!

Housing Recovery Is Looking A Lot Shakier Than Expected

Warren Buffett on Housing Market

Is Impact of Tax Credit Over?

Time to dump the housing tax credit?

Housing Is “In a Precarious State,” Yale’s Robert Shiller Says

Remarks by FDIC Chairman Sheila C. Bair

Interest Rates

Mortgage Rates Drop

Modifications

FHFA Extends Refinance Program by One Year

IBM getting deeper involved in simplifying distress property outcomes

Prices

Foreclosures to hinder prices for some time

House Price Appreciation a Long Way Off

Short Sales

Joe Filoseta on Short Sales

Link to The Mortgage Forgiveness Debt Relief Act and Debt Cancellation

Mortgage Insurance: The Next Roadblock to Short Sales?

Strategic Defaults

Housing: It’s Nothing Personal

Taxes

Good News on the Mortgage Tax Situation

Walking Away

Weighing the ramifications of simply walking away

Let us know how we did with the articles!

-The KCM Crew

Here is Part 2 of Skip Schenker’s two part series on understanding the FHA 203(k) and its real value. In case you missed yesterday’s, here is a link to Part 1.

How Is the Appraisal Completed?

The appraiser is given a detailed report from either a licensed contractor [for the “Streamline” 203(k)]; or from an FHA 203(k) Consultant [For the “Standard” 203(k)]. This Bid/Report details the scope of work that will be financed into the loan.  The appraiser visits the home and uses the scope of work report as his “rose colored glasses” and appraises the home under a “hypothetical assumption that the work has been completed”.  Thus the home is appraised “As-Repaired” even though the work has not been completed nor is it required to be completed until after the transaction closes and will be completed by the buyer thru his contractor.

Financing at 110% of the “Repaired Value”

Yes, it’s true.  Let’s use yesterday’s example; if the home is sold for $200,000 and the buyer’s acquisition cost is $258,000 including the renovation account.  If the home is appraised “As Repaired” at $235,000, this transaction will close because 110% of $235,000 is $258,500 and the acquisition cost is $258,000 which is less than 110%.  FHA will insure this loan and the transaction will close (some lenders have underwriting overlays and will only fund loans at 100% of the “repaired value”).  The FHA 203(k) can keep transactions together and eliminate the seller from having to make price reductions at the eleventh hour to keep the buyer from walking because the value did not come in.

Create Homeownership Opportunities for Owner-Occupant Buyers

Sellers have the opportunity to improve their image in the communities they serve by assisting in the revitalization efforts and helping to create homeownership opportunities.  Some servicers are being proactive by developing the feasibility study prior to marketing the property for home improvements a buyer may want to finance into their new loan.  A contractor provides a real bid that can be shared with prospective buyers.  This takes out the guesswork out of what the repair costs before the property goes under contract which reduces the potential for fall-out due to inaccurate estimate of the repair costs prior to contract acceptance.  I would encourage servicers to order the $150.00 feasibility study from the FHA 203(k) Consultant which gives a fool proof estimate of the required repairs that FHA will require to close the loan and make the home habitable.

The typical investor buyer is in it for the short haul– get in, make the home look nice, get it sold and get out with a profit.  The more the profit and the faster the turn time the better.  The owner-occupant buyer is typically in it for the long haul.  They want to raise their family and put roots in the community and make sure the repairs will provide years of enjoyment and safety.  They want to customize the home to their tastes.  They don’t want to purchase a home with white paint, beige carpet, cheap cabinets, fixtures and appliances.

Job Creation

When homes are purchased and repaired people are put to work.  It helped get us out of the depression in the 30’s and 40’s and it will work again. When someone purchases a distressed home using the FHA 203(k) and finances funds to update the home, they are helping put Americans back to work; the window manufactures, the carpet mills, the appliance makers, cabinet makers, light fixture manufactures, sink and toilet makers. Contractors are working again; retail stores and distributors are put back to work. Home inspectors, termite companies, roofing contractors, the list goes on and on including the jobs created in the real estate, escrow, title and finance industries.

WIN… WIN… WIN… WIN…

This is a WIN for the sellers of homes who will be able to sell their distressed assets to owner occupant buyers for a greater net than to investors… a WIN for the buyer who gets to purchase a home for a good price and gets to improve the property the way they want according to their tastes…  it’s a WIN for the Community because we are revitalizing neighborhoods and stabilizing home prices…  and it’s a WIN for the country and our economy by creating jobs and putting our unemployed back to work.

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Skip Schenker is the National Renovation Lending Manager at Benchmark Mortgage Inc, Benchmark Mortgage is a 10 year old mortgage banking firm located in Plano TX.  Skip, who also manages the Tustin, CA branch, has specialized in renovation lending since 1994; and has held positions at First Horizon, Wells Fargo, Bank of America and National Pacific Mortgage; He was a licensed contractor in the 1980’s.  Skip has spoken at industry conferences REOMAC, REOCON and has been teaching his continuing education class to hundreds of Realtors in CA since 1999.

Many readers have requested a post on the FHA 203k program. I was lucky to meet Skip Schenker, a national expert and instructor on the subject, while we were both speaking at a conference in Dallas last month. I asked him to share some of his thoughts. Here is his contribution. - Steve Harney

The FHA 203(k) Renovation loan may be the most important, least known, and underutilized government loan that could save the Real Estate market in 2010 and Beyond…

The Perfect Storm

Over 2 million homes were foreclosed in 2009 and more are expected this year.  Property values have declined significantly, and many economists expect property values to continue to decline into 2011.  Many of these homes have not been maintained nor updated and have old or antiquated electrical, plumbing systems, heating, roof, insulation, windows, doors, appliances, etc.

Cash-strapped homeowners losing their homes convert their updated  air conditioners, heaters, cabinets, countertops, doors and appliances into much needed cash by selling them on eBay, Craigslist or at garage sales;  Vacant homes get vandalized for any remaining valuable items like copper wiring, plumbing, light fixtures, and switches.

According to the Harvard University Joint Center for Housing Studies, 1/3 of all homes nationwide are old, 25 to 45 years old; and another 1/3 of all homes are older, 45+ years old. Our aging housing stock needs to be updated, modernized, and retrofitted to utilize the advances our building industry have made in the last 15 years.  Lack of liquidity in the mortgage market and consolidation of the mortgage originators reduced the amount of funding sources for new mortgages.  Lenders of traditional types of loans including Fannie Mae, Freddie Mac and the standard FHA  consider these properties poor collateral and won’t fund loans unless the work has been completed and the home is habitable.

The Dilemma

When Banks acquire these homes through foreclosure, what are their options?  They know that a pristine home with new paint, carpet, appliances and crown moldings will sell fast and for top dollar.  Unfortunately, they don’t have the manpower to manage or the cash to invest the $20,000 to $35,000 to bring an old run down house to modern standards.  There also remains the risk of starting a rehab project only to uncover some larger more expensive issues that could compound the banks losses, not to mention the potential for additional vandalism once the work is completed.  First time and move up buyers are getting forced out of the market because these properties will not qualify for traditional financing due to the condition of the home.  This brings in cash-buyers who want a deep discount on the property, thus driving the prices down further.

The Solution

The FHA 203(k) Renovation loan, available as a purchase or refinance, established in 1978 by the US Congress to revitalize our nation’s housing stock was ahead of its time by about 30 years.  The authors of this loan program must have seen this housing market coming.  The 203(k) allows an owner occupant home buyer to purchase a home in need of repair and get funding not only to purchase it but also to fix it up in one loan.  It allows the seller to sell and close a home “As-Is” no matter how bad the condition is.  A home could be condemned, it could have a cracked slab or damaged foundation, code violations, fire damaged, leaking roof, or no kitchen.   The buyer can close it “As-Is” and include funds to fix up the home in one loan.

A Real World Example

A buyer finds a home in the right neighborhood, on a good street, but it is old and was vandalized.  The home is listed for $200,000 and needs a new electrical system, plumbing, heating, kitchen and bathroom remodel, paint inside and out, refinish the wood floors and carpet in the bedrooms.  The total repair cost is $50,000

Purchase Price: $200,000

Renovation Account: $58,000  (Includes 10% contingency reserve, Inspections and other soft costs)

Total Acquisition Cost: $258,000

Base Loan Amount: $248,970  (Buyer must qualify for a loan at 96.5% LTV)

Down Payment: $9,030  (Minimum down payment is 3.5%)

The buyer gets to make a wish list Once the property is inspected and any deficiencies and FHA required improvements are identified, the buyer gets to make a wish list of the home improvements they want to do to their home.  Dual pane windows, new entry door, interior doors, new paint, carpet, cabinets, countertops, appliances, add a second floor, a master bedroom, a bonus room, finish a basement, add units, upgrade the electrical, plumbing or HVAC systems; landscaping walkways, decks… its almost endless the types of improvements you can do…

In Part 2 tomorrow, Skip will cover some of the logistics of the process. He will also talk about the overall benefits the program creates.

Skip Schenker is the National Renovation Lending Manager at Benchmark Mortgage Inc. Benchmark Mortgage is a 10 year old mortgage banking firm located in Plano TX.  Skip, who also manages the Tustin, CA branch, has specialized in renovation lending since 1994; and has held positions at First Horizon, Wells Fargo, Bank of America and National Pacific Mortgage; He was a licensed contractor in the 1980’s.  Skip has spoken at industry conferences REOMAC, REOCON and has been teaching his continuing education class to hundreds of Realtors in CA since 1999.

]]> http://kcmblog.com/2010/03/04/3250/feed/ 3 http://kcmblog.com/2010/03/03/puzzled-banks-now-buying-time/ http://kcmblog.com/2010/03/03/puzzled-banks-now-buying-time/#comments Wed, 03 Mar 2010 11:00:16 +0000 Steve Harney http://kcmblog.com/?p=3224

Banks Trying to Put the Pieces Together

Often I get asked why banks are not foreclosing on borrowers even after they do not make mortgage payments for many months. Actually, the answer is quite logical. To fully appreciate the banks position we must understand that the current housing market is like a Rubik’s cube. Every action the bank takes creates a challenge on the other side of this real estate puzzle.

The banks have no thirst for vacant properties for two reasons:

1.) Once they take ownership of the house through foreclosure they become liable for the property.

In many cases it is easier to hold off the foreclosure process and let the borrower continue maintaining and ‘house-sitting’ the property.

2.) The banks realize that an empty house impacts the value of other homes in the area.

Banks have mortgages on many of these surrounding properties. If value is affected, there is a greater chance that those borrowers will stop making mortgage payments.

The best source to get accurate data on vacancies is the Census Bureau Report on Residential Vacancies and Homeownership. They define the vacancy rate as follows:

The homeowner vacancy rate is the proportion of the homeowner inventory that is vacant and for sale.

The graph below uses data from the latest report dated February 2, 2010.

As we can see, the vacancy rate, which has historically been less than 2%, is now almost 3%. It is in the bank’s best interest not to add to the already growing supply of vacancies.

What are the banks doing?

In an article last week, the Los Angeles Times reported:

Throughout the country, people continue to default on their home loans — but lenders have backed off on forced evictions, allowing many to remain in their homes, essentially rent-free.

Several factors are driving the trend, industry experts say, including government pressure on banks to modify loans and keep people in their homes.

And with a glut of inventory in places like Southern California’s Inland Empire, Nevada and Arizona, lenders are loath to depress housing prices further by dumping more properties into a weak market.

Finally, allowing borrowers to stay in their homes helps protect the bank’s investment as it negotiates with the homeowners, said Gary Kirshner, a spokesman for Chase bank, a major lender.

“If the person’s in the property, there’s less chance for vandalism, and they’re probably maintaining the house,” he said.

Also Citibank is now allowing some borrowers to stay in the house for up to six months rent-free if they hand over the deed.

What does this mean to you?

I don’t know. Should you not be concerned about paying your mortgage and hope the bank just leaves you alone? I have found over the years that hope, though important, is usually not a good strategy.

Yesterday I posted on the latest Negative Equity Report from First American Core Logic. In that post, I quoted the report as saying that one of the ramifications of negative equity is that it is:

a major factor in changing homeowners’ default behavior.

That change in behavior could take on many different forms. One of the most alarming is the concept of ‘walking away’. By that I mean the borrower just decides to no longer make mortgage payments whether they have the financial where-with-all to pay or not. We have posted on this before.

In those posts, we followed the evolution of the concept from its beginnings in the blog-o-sphere, to the creation of a web site (www.YouWalkAway.com), to the main street media covering the issue. We then reported on how a law professor at the University of Arizona wrote a paper supporting the idea. 

Then something strange happened. Main stream media started to not just report on the concept but instead actually started to support a person’s right to walk away from their mortgage obligation. The New York Times in an article in January said:

“Mortgage holders do sign a promissory note, which is a promise to pay. But the contract explicitly details the penalty for nonpayment — surrender of the property…The borrower isn’t escaping the consequences; he is suffering them.”

A few days later, in their blog, The New York Times went further by giving step-by-step directions on how to walk away.

That brings us to last week. Brett Arends of The Wall Street Journal wrote in Market Watch, which is part of WSJ’s digital network, an article suggesting you may be stupid for not walking away. Here are a few excerpts from that article:

Millions of Americans are now deeply underwater on their mortgage. If you’re among them, you need to stop living in a dream world and give serious thought to walking away from the debt…No, you shouldn’t feel bad about it, and you shouldn’t feel guilty.

Stop trying to chase your lost equity. That money is gone. Don’t think like the gambler who blows more and more cash trying to win back his losses. That’s how a lot of people turn a small loss into a big one.

If you are reluctant to give up on “your” home, realize that it isn’t “yours.” If you are in negative equity, it’s the bank’s home. You’re just renting it. And right now you may be paying way above market rates. You need to be ruthless about your cash flow.

Still, when it comes to the idea of walking away from debts, many people are held back by a sense of morality. They feel it’s wrong to abandon their obligations. They don’t want to be a deadbeat. Your instincts, while honorable, are leading you astray. The economy is fundamentally amoral.

Whether we like it or not, walking away from debts is as American as apple pie.

Wow! The Wall Street Journal is telling people to walk away. I’m not here to say that advice is correct or incorrect. I’m just shocked they are saying it.

What does this mean to you?

If you are hoping that the housing market will recover soon, read the following thoughts from Professor Robert Shiller, founder of the Case Shiller Index and one of the leading experts on housing in this country:

“The market has shown a lot of momentum,” Mr. Shiller said. “What trend are we seeing now? It’s very ambiguous.” Mr. Shiller said that one of his greatest worries about the housing market are so-called strategic defaults, where borrowers who owe more than their homes are worth and can afford their monthly payments choose to default anyway.

Where did I read Mr. Shiller’s remarks? The Wall Street Journal. Two days before the Brent Arends article.

Can you throw one to my house?

First American Core Logic just released their Fourth Quarter 2009 Negative Equity Data Report last week. Negative equity, often referred to as “underwater” or “upside down,” means that borrowers owe more on their mortgage than their homes are worth. The reason this report is so important is that studies have shown that there is a direct correlation between a home losing equity and its chances of winding up a distressed property (foreclosure or short sale).The report itself states:

Negative equity is a significant drag on both the housing market and on economic growth. It is driving foreclosures and decreasing mobility for millions of homeowners.

Why does negative equity lead to foreclosures?

Simply explained, once borrowers see their house fall into the situation where the mortgage is higher than the value of the home, they think differently about paying said mortgage. From the report:

The rise in negative equity is closely tied to increases in pre‐foreclosure activity and is a major factor in changing homeowners’ default behavior.

Below is a graph showing that as the home continues to lose equity the percentage of pre-foreclosure activity raises dramatically.

If you live in an area that has lost equity, there is a growing concern that near-by homeowners will make the decision not to pay the mortgage. That will lead to an increase in distressed properties in the neighborhood.

Will that be a problem where I live?

Below is a graph of the negative equity numbers by state. Any percentage of homes in that category will present a challenge. The states with the largest percentages will have the biggest problems.

The red line is the national average. Any state to the left of it has a very serious challenge.

What does this mean to you?

An increase of inventory to the market will have an effect on values in that market. An increase in distressed inventory that will be at a discounted price will have a dramatic impact on prices. If you are thinking of selling in the near future, you should be aware of how this might impact your neighborhood.