State Senator briefs REALTORS®: On Friday (3/7), State Sen. Ellen Corbett gave the Valley Marketing Meeting in Pleasanton a behind-the-scenes look at what's happening in Sacramento and legislation she's working on that addresses real estate issues. Corbett represents the 10th Senate district which includes the cities of San Leandro, Fremont, Hayward, Union City, Pleasanton, Milpitas and Newark and part of San Jose, as well as the communities of Castro Valley, San Lorenzo and Sunol.
Here's a quick summary of her comments:
State budget: The governor's plan to deal with the state's multi-billion dollar budget deficit could have major negative consequences for public schools. Corbett urged REALTORS® to oppose these cuts because of the impact they could have on property values. She alluded to the possible formation of a coalition of interest groups that could fight to protect school funding and suggested REALTOR participation.
Foreclosures: Corbett discussed pending legislation that would ease the tax burden for property owners faced with a foreclosure.
Transportation: Commute times and traffic congestion have a direct impact on the quality of life for Alameda County residents. Corbett explained efforts to secure funding to improve I-580 and praised work by Alameda County Supervisor Scott Haggerty to ensure our region gets a share of transportation resources.
Corbett also took questions from the audience. While she's not officially involved with the San Leandro School District, she did an admirable job responding to concerns about out-of-district students attending San Leandro Schools.
REALTOR® Impact: Corbett chairs the Senate Judiciary Committee which reviews legislation that may impact the real estate profession. It is in our interest to cultivate a strong relationship with the senator and ensure she understands REALTOR® issues.
Next Steps: Regarding the senator's comments about a school funding coalition, C.A.R. hasn't been approached to join any such group - yet. However, C.A.R. has historically supported school funding bonds and in 2000 supported Proposition 39, which made it easier for school districts to pass bond measures to finance school construction and improvements by reducing the vote requirement from two-thirds to a 55 percent supermajority.
Senator Corbett really enjoyed speaking at the Valley Marketing Meeting this week and her visit to the Tri-Cities group earlier this year. We're looking forward to hosting her at the Central County Marketing Meeting in the near future.
This information is compliments of David Stark Bay East Association of Realtors
Showing posts with label real estate. Show all posts
Showing posts with label real estate. Show all posts
Saturday, March 8, 2008
Saturday, February 23, 2008
Some Banks are Withdrawing Equity Line of Credit From Homeowners!
Homeowners Losing Equity Lines
As House Values Fall, Some Banks Withdraw Credit
(By Susan Biddle -- The Washington Post)
In one brief phone call, Nancy Corazzi's lender yanked away what was left of the $95,000 home equity line of credit that she and her husband took out five months ago.
The lender informed her that her Howard County home had plummeted in value and the company did not want the risk that she would owe more than the house was worth.
"I got off the phone and I was shaking," said Corazzi, who was using the money to pay preschool tuition for her twins ."I was near tears. We needed this credit line to get us through some tough times."
Several of the nation's largest lenders, along with smaller ones, are shutting off access to home equity lines in areas where home values are declining. It's an unusually aggressive move as the industry grapples with fallout from the mortgage crisis that began unfolding last year.
Now that home prices have dropped in many parts of the country, lenders are nervous that they may never collect the money that they extended to borrowers. They are responding by freezing or lowering the credit limits on home equity lines, leaving thousands of borrowers like Corazzi in the lurch.
"Nearly all the top home equity lenders I know of are doing this or considering doing this," said Joe Belew, president of the Consumer Bankers Association, which represents some of the nation's largest home equity lenders. "They are all looking at how to protect themselves as real estate values go down, and it's just not good for the borrowers to get so overextended."
Countrywide Financial, the nation's largest mortgage lender, suspended the home equity lines of 122,000 customers last month after reviewing their property values and outstanding loan balances. The company, like others, has an internal automated appraisal system that tracks values.
The company declined to disclose how many of the affected borrowers lived in the Washington area. About 381,000 borrowers in the region had home equity lines at the end of last year, according to Moody's economy.com.
USAA Federal Savings Bank froze or reduced credit lines for 15,000 of its customers, including Corazzi, and will not reconsider its decisions until "real estate values improve substantially," the company said in a statement.
Bank of America is starting to do the same and is contacting some borrowers, said Terry Francisco, a bank spokesman.
"We know this can cause hardship to our customers," Francisco said. "If they used the credit to make payments that are in the pipeline, we will work with them to make sure the payment goes through."
The appeal of home equity lines has always been their flexibility
They operate like credit cards, with the home as collateral. Borrowers can use the money when they want, up to a limit, then repay it over time. The limit depends on the amount of equity they have in the house. Home equity lines, which grew popular in the late 1980s, have typically attracted educated borrowers with above-average incomes and job stability who tend to repay what they borrow in a timely manner, industry studies show.
Since the crisis in the housing and mortgage markets started, however, delinquencies on home equity lines reached 0.84 percent in the third quarter, the highest level in a decade, the American Bankers Association said.
Because missed payments are often a precursor to foreclosure, lenders are spooked. Companies that hold credit lines typically recoup little, if any, of their money in a foreclosure, hence the retreat on home equity lending.
Larry F. Pratt, chief executive of First Savings Mortgage in McLean, said most mortgage documents he has seen give lenders wide latitude to suspend or freeze credit lines.
"A layperson would not recognize the language because it's not that blatant," Pratt said. "It talks about deterioration of the value of the asset or the value of the collateral. . . . It's not boilerplate language by any means."
Maggie DelGallo did not realize that when she took out a home equity line a few years ago on her home in Loudoun County. Her lender recently froze the line.
DelGallo, a real estate broker, has used some of her credit line over the years. Had she known the freeze was coming, "I would have drained it," she said. "I would have taken every dime and possibly placed it in a money-market vehicle."
DelGallo said she does not think she is in dire straits. "It's more like a huge disappointment," she said. "I have this line of credit attached to my home that's useless."
Last year, 34 percent of borrowers said they used their home equity lines to pay off other debt and 29 percent used them for home renovation, according to a survey of lenders by BenchMark Consulting International. Another 31 percent used them to pay for other things, such as medical bills, weddings or vacations.
Corazzi initially used her line to consolidate debt. She and her husband took out the credit line in October because they thought her job was in jeopardy.
It was. In December, her salaried position as a loan-processing manager at a local mortgage bank changed to a commission-only job.
Given the slowdown in the industry, Corazzi has collected only one paycheck since then. Her husband, Ron, sells large-format copiers and printers to builders, and his salary alone cannot support them and their four children, ages 4 to 8.
By the time their lender called, the couple had $45,000 remaining unused on the credit line. Ron Corazzi is now looking for a second job, and his wife is hoping to pick up work as a substitute teacher.
Meanwhile, they are trying to open a new home equity line elsewhere, but chances are slim given the change in Nancy Corazzi's job status and the drop in their home's value. Five months ago, the Ellicott City house was appraised at $560,000; the lender says it is now worth $469,100.
"I told them, 'You guys are wrong,' " Nancy Corazzi said. "They said, 'Sorry, this is what we're doing in the entire area.' "
Corazzi said she was blindsided by what's happened. "I didn't know they could do that. I thought I was too smart to have something like this happen to me."
As House Values Fall, Some Banks Withdraw Credit
(By Susan Biddle -- The Washington Post)
In one brief phone call, Nancy Corazzi's lender yanked away what was left of the $95,000 home equity line of credit that she and her husband took out five months ago.
The lender informed her that her Howard County home had plummeted in value and the company did not want the risk that she would owe more than the house was worth.
"I got off the phone and I was shaking," said Corazzi, who was using the money to pay preschool tuition for her twins ."I was near tears. We needed this credit line to get us through some tough times."
Several of the nation's largest lenders, along with smaller ones, are shutting off access to home equity lines in areas where home values are declining. It's an unusually aggressive move as the industry grapples with fallout from the mortgage crisis that began unfolding last year.
Now that home prices have dropped in many parts of the country, lenders are nervous that they may never collect the money that they extended to borrowers. They are responding by freezing or lowering the credit limits on home equity lines, leaving thousands of borrowers like Corazzi in the lurch.
"Nearly all the top home equity lenders I know of are doing this or considering doing this," said Joe Belew, president of the Consumer Bankers Association, which represents some of the nation's largest home equity lenders. "They are all looking at how to protect themselves as real estate values go down, and it's just not good for the borrowers to get so overextended."
Countrywide Financial, the nation's largest mortgage lender, suspended the home equity lines of 122,000 customers last month after reviewing their property values and outstanding loan balances. The company, like others, has an internal automated appraisal system that tracks values.
The company declined to disclose how many of the affected borrowers lived in the Washington area. About 381,000 borrowers in the region had home equity lines at the end of last year, according to Moody's economy.com.
USAA Federal Savings Bank froze or reduced credit lines for 15,000 of its customers, including Corazzi, and will not reconsider its decisions until "real estate values improve substantially," the company said in a statement.
Bank of America is starting to do the same and is contacting some borrowers, said Terry Francisco, a bank spokesman.
"We know this can cause hardship to our customers," Francisco said. "If they used the credit to make payments that are in the pipeline, we will work with them to make sure the payment goes through."
The appeal of home equity lines has always been their flexibility
They operate like credit cards, with the home as collateral. Borrowers can use the money when they want, up to a limit, then repay it over time. The limit depends on the amount of equity they have in the house. Home equity lines, which grew popular in the late 1980s, have typically attracted educated borrowers with above-average incomes and job stability who tend to repay what they borrow in a timely manner, industry studies show.
Since the crisis in the housing and mortgage markets started, however, delinquencies on home equity lines reached 0.84 percent in the third quarter, the highest level in a decade, the American Bankers Association said.
Because missed payments are often a precursor to foreclosure, lenders are spooked. Companies that hold credit lines typically recoup little, if any, of their money in a foreclosure, hence the retreat on home equity lending.
Larry F. Pratt, chief executive of First Savings Mortgage in McLean, said most mortgage documents he has seen give lenders wide latitude to suspend or freeze credit lines.
"A layperson would not recognize the language because it's not that blatant," Pratt said. "It talks about deterioration of the value of the asset or the value of the collateral. . . . It's not boilerplate language by any means."
Maggie DelGallo did not realize that when she took out a home equity line a few years ago on her home in Loudoun County. Her lender recently froze the line.
DelGallo, a real estate broker, has used some of her credit line over the years. Had she known the freeze was coming, "I would have drained it," she said. "I would have taken every dime and possibly placed it in a money-market vehicle."
DelGallo said she does not think she is in dire straits. "It's more like a huge disappointment," she said. "I have this line of credit attached to my home that's useless."
Last year, 34 percent of borrowers said they used their home equity lines to pay off other debt and 29 percent used them for home renovation, according to a survey of lenders by BenchMark Consulting International. Another 31 percent used them to pay for other things, such as medical bills, weddings or vacations.
Corazzi initially used her line to consolidate debt. She and her husband took out the credit line in October because they thought her job was in jeopardy.
It was. In December, her salaried position as a loan-processing manager at a local mortgage bank changed to a commission-only job.
Given the slowdown in the industry, Corazzi has collected only one paycheck since then. Her husband, Ron, sells large-format copiers and printers to builders, and his salary alone cannot support them and their four children, ages 4 to 8.
By the time their lender called, the couple had $45,000 remaining unused on the credit line. Ron Corazzi is now looking for a second job, and his wife is hoping to pick up work as a substitute teacher.
Meanwhile, they are trying to open a new home equity line elsewhere, but chances are slim given the change in Nancy Corazzi's job status and the drop in their home's value. Five months ago, the Ellicott City house was appraised at $560,000; the lender says it is now worth $469,100.
"I told them, 'You guys are wrong,' " Nancy Corazzi said. "They said, 'Sorry, this is what we're doing in the entire area.' "
Corazzi said she was blindsided by what's happened. "I didn't know they could do that. I thought I was too smart to have something like this happen to me."
Thursday, February 21, 2008
Californians Can Afford to Purchase a New Home!
Group says more Californians can afford to buy their first home
By ALEX VEIGA, AP Business Writer
(02-19) 12:13 PST Los Angeles (AP) --
Frustrated California renters take heed: A trade group says it's getting easier for people to afford their first home.
With home prices in a downward spiral in many once-booming areas, the percentage of California households that can afford to finance an entry-level home increased in the last three months of 2007 compared to the same period a year earlier, the California Association of Realtors said Tuesday.
The trade group for real estate agents calculates affordability based on the minimum household income required to make a 10 percent downpayment and secure an adjustable interest rate loan at 6.21 percent.
Some 33 percent of the households in the state met those guidelines in the fourth quarter — up from 25 percent in the same three months of 2006, the association said.
Buyers needed to earn $82,200 to afford financing of $411,170, the typical statewide price for an entry-level home during the quarter, the trade association estimated.
The monthly payment for such a purchase, including taxes and insurance, was $2,740, the association said.
An entry-level home was defined as one priced at about 85 percent of the median home price in an area.
The most affordable area of the state during the quarter was the desert north of Los Angeles, where some 54 percent of households met the association's $43,800 annual income threshold to finance an entry-level home priced at $218,880.
Sacramento County was next, with 53 percent of households within the income range needed to afford a home priced at $252,920.
The least affordable area was the Central Coast region of Monterey, where only 20 percent of households earned the $118,200 needed to finance an entry-level home at $591,200.
In Los Angeles County, 27 percent of households earned the $86,700 a year needed to buy a home priced at $433,200.
Some 46 percent of households in Riverside and San Bernardino counties, which have been hit particularly hard by rising foreclosures and falling home values, earned $57,600 a year, enough to finance a $287,330 home, the association said.
In the San Francisco Bay area, meanwhile, only 23 percent of households reported income of at least $132,300, the minimum to purchase a home priced at $660,660.
Compliments of:
California Association of Realtors: www.car.org
By ALEX VEIGA, AP Business Writer
(02-19) 12:13 PST Los Angeles (AP) --
Frustrated California renters take heed: A trade group says it's getting easier for people to afford their first home.
With home prices in a downward spiral in many once-booming areas, the percentage of California households that can afford to finance an entry-level home increased in the last three months of 2007 compared to the same period a year earlier, the California Association of Realtors said Tuesday.
The trade group for real estate agents calculates affordability based on the minimum household income required to make a 10 percent downpayment and secure an adjustable interest rate loan at 6.21 percent.
Some 33 percent of the households in the state met those guidelines in the fourth quarter — up from 25 percent in the same three months of 2006, the association said.
Buyers needed to earn $82,200 to afford financing of $411,170, the typical statewide price for an entry-level home during the quarter, the trade association estimated.
The monthly payment for such a purchase, including taxes and insurance, was $2,740, the association said.
An entry-level home was defined as one priced at about 85 percent of the median home price in an area.
The most affordable area of the state during the quarter was the desert north of Los Angeles, where some 54 percent of households met the association's $43,800 annual income threshold to finance an entry-level home priced at $218,880.
Sacramento County was next, with 53 percent of households within the income range needed to afford a home priced at $252,920.
The least affordable area was the Central Coast region of Monterey, where only 20 percent of households earned the $118,200 needed to finance an entry-level home at $591,200.
In Los Angeles County, 27 percent of households earned the $86,700 a year needed to buy a home priced at $433,200.
Some 46 percent of households in Riverside and San Bernardino counties, which have been hit particularly hard by rising foreclosures and falling home values, earned $57,600 a year, enough to finance a $287,330 home, the association said.
In the San Francisco Bay area, meanwhile, only 23 percent of households reported income of at least $132,300, the minimum to purchase a home priced at $660,660.
Compliments of:
California Association of Realtors: www.car.org
Tuesday, February 19, 2008
NAR's Economist's Commentary!
Refueling the Housing Bubble?
By NAR Chief Economist Lawrence Yun
The Federal Reserve has been aggressively cutting rates recently and the question is being raised about parallels to the past. Back in 2001, in the aftermath of the internet stock bubble collapse and the September 11 terrorist attacks, Alan Greenspan — then the Fed chairman — made deep cuts in interest rates in order to stave off a possible economic recession. Many also blame Mr. Greenspan for having fueled the housing market bubble and subsequent collapse by keeping the rates too low for too long.
Now in early 2008, with the economy possibly heading into a recession — as evidenced by the GDP growth rate slowing from 4.1% in third quarter to 0.6% in the fourth quarter — the current Fed Chair, Ben Bernanke, has been following a very similar step of sharply cutting fed funds rates in order to revive economic growth — partly by making home buying financially enticing. Though there is never a direct correction between the Fed funds rate and mortgage rates, which are outside of the Fed's control and determined by the global bond market, the current 30-year mortgage rates have come down to essentially 45-year low levels. Aside from a few months in 2003, mortgage rates have never been this low since the early 1960s. A drop in the average mortgage rate from nearly 7% in mid-2005 to the current 5.7% would reduce monthly mortgage payments from $1330 to $1160 on a $200,000 mortgage. The average savings would be $340 per month or $4,000 per year on a $400,000 mortgage.
Therefore, could the Fed be simply refueling the bubble by dangling financial incentives to buy a home? Well, let's replay the key factors related to the recent bubble-collapse and see whether the same behavioral patterns will reemerge. Keep in mind that there are significant local market variations, but the markets that had the huge swings followed the below pattern:
The Fed started cutting rates from 2001 — with the Fed funds rate eventually reaching 1% by mid-2003.
The mortgage rate fell to 5.5% by the summer of 2003 from 8% in 2000. ARMS rates fell from 7% to 3.5% over the same period.
Housing demand rose with existing and new home sales hitting successive high marks in 2003, 2004, and 2005. Inventory fell as a result.
Home prices accelerated. For example, in the D.C. region home prices more than doubled from $204,000 to $426,000 from 2001 to 2005. Homeowners' net worth leapt by over $200,000 as a result — a figure many would considered good lifetime savings.
Given the general weakness in the stock market and relative "easy" wealth gains for real estate owners — there was an increasing view of homeownership and real estate as a financial play rather than in terms of family and housing needs considerations.
Housing demand ran exceptionally high, but the demand could only be realized if people could get the financing.
Global capital providers were chasing after high yields and were eager to provide the financing because…
Ratings agencies gave their blessing on subprime products, giving the impression that these were 'safe' alternatives.
Moody's, Standard & Poor's, and other ratings agency raked in revenue by giving out top Triple-A ratings (an inherent conflict of interest exists when ratings agencies get their revenue from mortgage underwriters/securitizers… rather like a professor who gives out a lot of "A" grades will draw more tuition paying students to his class).
With funding plentiful, subprime and no documentation loans proliferated — if you had a heartbeat, you could get a loan.
Housing demand was further pushed higher as herds of house-flippers entered the market, and home prices accelerated in those markets. Prices grew by leaps and bounds in markets of around 70% in short two years — places like Las Vegas, Miami, and Phoenix, and Sacramento.
Inventories were pushed down to exceptionally low levels and homebuilders could not keep up with demand.
From late 2004, the Fed began to tighten and mortgage rates climb in 2005.
Housing demand naturally fell off.
Inventory quickly built — from a combination of lower demand, builders continuing to build at a high pace, and some speculators/flippers realizing that the period of easy price gains was coming to an end.
Rising inventory held back price gains.
Price stagnation no longer permitted mortgage refinancing. Flippers/speculators started carrying burdensome mortgage costs — some begin to simply walk away — pushing inventory higher.
Non-flippers — primary homeowners, who took out subprime loans, also faced the same price stagnation, but also the resetting higher interest rates. Refinancing is not possible and some have been forced to foreclose
More and more flippers/speculators and homeowners are unable to carry the high resetting interest rates and simply walk away. Lenders begin to write-down loan losses.
After the fact and very late, the ratings agencies stated that subprime loans are no longer Triple-A quality.
Global capital providers stopped funding subprime loans and the subprime market came to a halt.
Global capital providers, having been burned, also stop funding any U.S. mortgages other than those with Fannie and Freddie backing. The jumbo loan market, therefore, struggles.
From mid-2007, a lack of market liquidity and economic slowdown forces the Fed to cut rates.
Conforming mortgage rates again fall to historic lows, but not jumbo loan rates.
The Fed has been and is further ready to make deeper cuts.
Going back to our earlier question: is the current action by the Fed simply trying to replay the same volatile game? The answer is an unambiguous NO. The same game is played out because the global capital providers will not be taken for fools again. After being burned, German mutual funds or the Chinese government or the Florida's teacher pension fund will no longer buy toxic subprime loans. Without the loans, homebuyers simply cannot enter the marketplace independent of their desires. We are back to the careful underwriting standards of verifying people's income, requiring escrow accounts, and back to thoroughly checking borrower's ability to repay the loan.
However, the current low interest rate policies of the Fed are a big help to housing because low rates can begin to furnish genuine potential homebuyers with the financial capacity to think seriously about becoming a homeowner. Furthermore, the rate cut is lessening the degree of forthcoming ARM resets, thereby lessening the burden the current subprime loan borrower faces. So the current policy of Ben Bernanke will help stabilize the housing market.
The Federal Reserve, however, should be mindful to not lower the fed funds rate too greatly. Inflation is expected to head lower in 2008 but too much money can fuel inflationary pressures. If that happens, 30-year mortgage rates will RISE, and therefore, choke off any housing recovery. A careful balance must be taken regarding how low to bring down the fed funds rate.
Though some in the blogosphere have figured Alan Greenspan as one of the key persons to blame for the current housing mess, I do not blame Mr. Greenspan. I believe there is plenty of blame to go around due to other factors. Global capital providers misunderstood and were simply not careful about purchasing securities composed on little income documentation and of risky-borrowers. Mortgage originators just originated loans to anyone including to suspicious borrowers because they had no skin in the game (see the recent academic article on this topic by a group of professors from the University of Chicago). There were also many books about how to endlessly profit from real estate. Consumers — particularly the flippers/speculators — also need to bear some of the blame.
But the biggest blame in my view goes to Moody's and Standard & Poor's — the rating agencies. If they had properly assessed the risk as is their job, then global capital would have never reached subprime homebuyers and flippers. The housing boom would have stopped dead in its tracks. We do not yet know how much of the ratings firms' assessment were clouded by their financial interest in giving out easy Triple-A grades. Many workers at Moody's and Standard & Poor's took home hefty bonus checks when revenue skyrocketed from providing high ratings.
It is also fine for people to point the finger at me. In a fast changing market conditions, I too have been off on my forecast. I knew that the boom was clearly unsustainable and I made the forecast in early 2007 that home prices were likely to experience a price decline on a national level for the first time since the Great Depression. The national median home price indeed fell by 1.4%. I believe I downgraded my forecast for ten or so straight months in 2007 as it was strongly pointed out to me. At the same time, the Blue Chip consensus forecast, comprised of about top 50 private forecasters, including forecasts by Merrill Lynch, Goldman Sachs, UCLA, and the like — had also downgraded the housing forecast by more than 20 straight months. Forecasting is never perfect. Forecasts are bound to be off but the forecaster's job is to make the best prognosis given the available information at the time. The readers should always view any forecast with caveat emptor.
But back to the original question: Will we experience a re-emergence of a housing boom from the current easy money policy by the Fed? The answer is no because as Abraham Lincoln said — fool me once, shame on you. Fool me twice, shame on me. It will be impossible to part global capital providers' money with another foolish investment.
By NAR Chief Economist Lawrence Yun
The Federal Reserve has been aggressively cutting rates recently and the question is being raised about parallels to the past. Back in 2001, in the aftermath of the internet stock bubble collapse and the September 11 terrorist attacks, Alan Greenspan — then the Fed chairman — made deep cuts in interest rates in order to stave off a possible economic recession. Many also blame Mr. Greenspan for having fueled the housing market bubble and subsequent collapse by keeping the rates too low for too long.
Now in early 2008, with the economy possibly heading into a recession — as evidenced by the GDP growth rate slowing from 4.1% in third quarter to 0.6% in the fourth quarter — the current Fed Chair, Ben Bernanke, has been following a very similar step of sharply cutting fed funds rates in order to revive economic growth — partly by making home buying financially enticing. Though there is never a direct correction between the Fed funds rate and mortgage rates, which are outside of the Fed's control and determined by the global bond market, the current 30-year mortgage rates have come down to essentially 45-year low levels. Aside from a few months in 2003, mortgage rates have never been this low since the early 1960s. A drop in the average mortgage rate from nearly 7% in mid-2005 to the current 5.7% would reduce monthly mortgage payments from $1330 to $1160 on a $200,000 mortgage. The average savings would be $340 per month or $4,000 per year on a $400,000 mortgage.
Therefore, could the Fed be simply refueling the bubble by dangling financial incentives to buy a home? Well, let's replay the key factors related to the recent bubble-collapse and see whether the same behavioral patterns will reemerge. Keep in mind that there are significant local market variations, but the markets that had the huge swings followed the below pattern:
The Fed started cutting rates from 2001 — with the Fed funds rate eventually reaching 1% by mid-2003.
The mortgage rate fell to 5.5% by the summer of 2003 from 8% in 2000. ARMS rates fell from 7% to 3.5% over the same period.
Housing demand rose with existing and new home sales hitting successive high marks in 2003, 2004, and 2005. Inventory fell as a result.
Home prices accelerated. For example, in the D.C. region home prices more than doubled from $204,000 to $426,000 from 2001 to 2005. Homeowners' net worth leapt by over $200,000 as a result — a figure many would considered good lifetime savings.
Given the general weakness in the stock market and relative "easy" wealth gains for real estate owners — there was an increasing view of homeownership and real estate as a financial play rather than in terms of family and housing needs considerations.
Housing demand ran exceptionally high, but the demand could only be realized if people could get the financing.
Global capital providers were chasing after high yields and were eager to provide the financing because…
Ratings agencies gave their blessing on subprime products, giving the impression that these were 'safe' alternatives.
Moody's, Standard & Poor's, and other ratings agency raked in revenue by giving out top Triple-A ratings (an inherent conflict of interest exists when ratings agencies get their revenue from mortgage underwriters/securitizers… rather like a professor who gives out a lot of "A" grades will draw more tuition paying students to his class).
With funding plentiful, subprime and no documentation loans proliferated — if you had a heartbeat, you could get a loan.
Housing demand was further pushed higher as herds of house-flippers entered the market, and home prices accelerated in those markets. Prices grew by leaps and bounds in markets of around 70% in short two years — places like Las Vegas, Miami, and Phoenix, and Sacramento.
Inventories were pushed down to exceptionally low levels and homebuilders could not keep up with demand.
From late 2004, the Fed began to tighten and mortgage rates climb in 2005.
Housing demand naturally fell off.
Inventory quickly built — from a combination of lower demand, builders continuing to build at a high pace, and some speculators/flippers realizing that the period of easy price gains was coming to an end.
Rising inventory held back price gains.
Price stagnation no longer permitted mortgage refinancing. Flippers/speculators started carrying burdensome mortgage costs — some begin to simply walk away — pushing inventory higher.
Non-flippers — primary homeowners, who took out subprime loans, also faced the same price stagnation, but also the resetting higher interest rates. Refinancing is not possible and some have been forced to foreclose
More and more flippers/speculators and homeowners are unable to carry the high resetting interest rates and simply walk away. Lenders begin to write-down loan losses.
After the fact and very late, the ratings agencies stated that subprime loans are no longer Triple-A quality.
Global capital providers stopped funding subprime loans and the subprime market came to a halt.
Global capital providers, having been burned, also stop funding any U.S. mortgages other than those with Fannie and Freddie backing. The jumbo loan market, therefore, struggles.
From mid-2007, a lack of market liquidity and economic slowdown forces the Fed to cut rates.
Conforming mortgage rates again fall to historic lows, but not jumbo loan rates.
The Fed has been and is further ready to make deeper cuts.
Going back to our earlier question: is the current action by the Fed simply trying to replay the same volatile game? The answer is an unambiguous NO. The same game is played out because the global capital providers will not be taken for fools again. After being burned, German mutual funds or the Chinese government or the Florida's teacher pension fund will no longer buy toxic subprime loans. Without the loans, homebuyers simply cannot enter the marketplace independent of their desires. We are back to the careful underwriting standards of verifying people's income, requiring escrow accounts, and back to thoroughly checking borrower's ability to repay the loan.
However, the current low interest rate policies of the Fed are a big help to housing because low rates can begin to furnish genuine potential homebuyers with the financial capacity to think seriously about becoming a homeowner. Furthermore, the rate cut is lessening the degree of forthcoming ARM resets, thereby lessening the burden the current subprime loan borrower faces. So the current policy of Ben Bernanke will help stabilize the housing market.
The Federal Reserve, however, should be mindful to not lower the fed funds rate too greatly. Inflation is expected to head lower in 2008 but too much money can fuel inflationary pressures. If that happens, 30-year mortgage rates will RISE, and therefore, choke off any housing recovery. A careful balance must be taken regarding how low to bring down the fed funds rate.
Though some in the blogosphere have figured Alan Greenspan as one of the key persons to blame for the current housing mess, I do not blame Mr. Greenspan. I believe there is plenty of blame to go around due to other factors. Global capital providers misunderstood and were simply not careful about purchasing securities composed on little income documentation and of risky-borrowers. Mortgage originators just originated loans to anyone including to suspicious borrowers because they had no skin in the game (see the recent academic article on this topic by a group of professors from the University of Chicago). There were also many books about how to endlessly profit from real estate. Consumers — particularly the flippers/speculators — also need to bear some of the blame.
But the biggest blame in my view goes to Moody's and Standard & Poor's — the rating agencies. If they had properly assessed the risk as is their job, then global capital would have never reached subprime homebuyers and flippers. The housing boom would have stopped dead in its tracks. We do not yet know how much of the ratings firms' assessment were clouded by their financial interest in giving out easy Triple-A grades. Many workers at Moody's and Standard & Poor's took home hefty bonus checks when revenue skyrocketed from providing high ratings.
It is also fine for people to point the finger at me. In a fast changing market conditions, I too have been off on my forecast. I knew that the boom was clearly unsustainable and I made the forecast in early 2007 that home prices were likely to experience a price decline on a national level for the first time since the Great Depression. The national median home price indeed fell by 1.4%. I believe I downgraded my forecast for ten or so straight months in 2007 as it was strongly pointed out to me. At the same time, the Blue Chip consensus forecast, comprised of about top 50 private forecasters, including forecasts by Merrill Lynch, Goldman Sachs, UCLA, and the like — had also downgraded the housing forecast by more than 20 straight months. Forecasting is never perfect. Forecasts are bound to be off but the forecaster's job is to make the best prognosis given the available information at the time. The readers should always view any forecast with caveat emptor.
But back to the original question: Will we experience a re-emergence of a housing boom from the current easy money policy by the Fed? The answer is no because as Abraham Lincoln said — fool me once, shame on you. Fool me twice, shame on me. It will be impossible to part global capital providers' money with another foolish investment.
Monday, February 18, 2008
Lenders singling out Specific Counties!
San Francisco Chronicle
Kenneth Harney
Sunday, February 3, 2008
(02-03) 04:00 PST Washington -- Critics call it the new redlining: Many of the country's largest mortgage lenders are imposing loan restrictions in entire counties or ZIP codes that they rank as risky or "declining."
On Jan. 25, Countrywide Bank sent mortgage brokers a list that categorized hundreds of counties as "soft markets" with rankings from 1 to 5, in ascending order of perceived risk. In areas rated in categories 4 and 5 - roughly 100 counties in metropolitan areas nationwide - Countrywide said it will now require 5 percent larger down payments from most applicants. If a loan program previously allowed a minimum 5 percent down payment, now applicants will be required to come up with 10 percent to qualify.
An additional 970-plus counties are rated more-moderate risks, in categories 1 to 3, with 5 percent down payment increases if an appraisal report indicates there is an "oversupply" of houses for sale or a marketing time of more than six months.
Other national lenders have distributed their own proprietary "declining markets" lists. GMAC-ResCap of Minneapolis even has a Web site allowing loan officers to type in a ZIP code and instantaneously learn whether the company ranks the area a D, C or lower risk. Although the public is not supposed to see the site, one mortgage company executive provided me with an access link.
In late January, a ZIP code for McLean, Va., - a high-income, high-cost residential community and home of mortgage investment giant Freddie Mac - was rated a high-risk D. The upscale residential neighborhood in northwest Washington, D.C., where Fannie Mae, another mortgage investor, has its headquarters was rated at an elevated risk of C.
Ironically, restrictions imposed by Fannie Mae late last year have prompted lenders to compile area by area risk ratings and impose down payment penalties. In a notice to lenders on Dec. 5, Fannie Mae said all loans delivered after Jan. 15 of this year on properties located within "declining" areas would be subject to 5 percent higher down payment requirements. The company's own electronic underwriting system had begun flagging selected markets as high risk in summer. Fannie Mae also strongly encouraged lenders to use "supplemental" data sources to come up with their own risk-ratings by market area.
Critics say that imposing higher down payment standards or other penalties for applicants in an entire county, metropolitan area or ZIP code is unfair to homeowners and buyers whose properties are located in sub-markets or neighborhoods within those jurisdictions that may not be declining in value, or not by enough to justify punitive underwriting requirements.
Ted Grose, president of 1st Mortgage Advisors Inc. in Los Angeles, said labeling entire counties as "declining" is "ridiculous - it totally fails to distinguish between areas where prices are rising or relatively stable, and other neighborhoods or communities where they are not."
David Berenbaum, executive vice president of the National Community Reinvestment Coalition, a consumer advocacy group active in litigation against subprime mortgage companies, said that "sound underwriting has nothing to do with geography. It is based on the income and qualifications of the applicant, and the valuation of the property by a professional appraiser."
"Anything else," said Berenbaum, "runs afoul" of federal fair lending and civil rights statutes. "It is redlining."
Paul Skeens, head broker for Carteret Mortgage Corp. in Waldorf, Md., said he had observed that lenders' county and ZIP code designations "have their heaviest impacts on areas with high proportions of minority groups and people with moderate incomes who bought houses" with low and no-down payment programs during the first half of the decade.
Labeling these areas as "declining" and then imposing higher down-payment requirements "becomes a self-fulfilling prophecy," said Skeens. "People can't buy there because they need more cash up front, the houses don't sell, and prices go down."
In an interview, Brian Robinett, chief credit and operations officer for wholesale lending at Countrywide, vigorously rejected the criticism. Countrywide's risk-ranking list distributed Jan. 25, he said, is based on comprehensive data on prices, sales and other indicators spanning 12 to 18 months.
"It would be hard to make the case (of redlining) against" the company's ratings. After all, according to Robinett, a wide variety of property types, income levels and ethnic groups are "equally affected" by every risk ranking. He cited the Los Angeles area as an example, with "Beverly Hills on one extreme" and lower-income, more heavily minority communities within the county on the other.
The takeaway for the time being on this issue: If a major lender has tagged your ZIP code, county or entire metropolitan area with a scarlet letter - and they exist in virtually every state, including many in places generally assumed to have relatively healthy market conditions - you're going to need more cash up front. That will be the case even if the area risk designation has no real applicability to the house you hope to buy or finance.
Bay Area 'soft' markets
Countrywide Financial gave the following ratings to the nine Bay Area counties. The numbers mean the lender will likely require a larger down payment in Alameda, Contra Costa, Sonoma and Solano counties.
County Level
San Francisco 2
San Mateo 2
Santa Clara 2
Alameda 4
Contra Costa 4
Napa 3
Sonoma 4
Solano 4
Marin 2
E-mail Ken Harney at kenharney@earthlink.net.
This article appeared on page K - 8 of the San Francisco Chronicle
Kenneth Harney
Sunday, February 3, 2008
(02-03) 04:00 PST Washington -- Critics call it the new redlining: Many of the country's largest mortgage lenders are imposing loan restrictions in entire counties or ZIP codes that they rank as risky or "declining."
On Jan. 25, Countrywide Bank sent mortgage brokers a list that categorized hundreds of counties as "soft markets" with rankings from 1 to 5, in ascending order of perceived risk. In areas rated in categories 4 and 5 - roughly 100 counties in metropolitan areas nationwide - Countrywide said it will now require 5 percent larger down payments from most applicants. If a loan program previously allowed a minimum 5 percent down payment, now applicants will be required to come up with 10 percent to qualify.
An additional 970-plus counties are rated more-moderate risks, in categories 1 to 3, with 5 percent down payment increases if an appraisal report indicates there is an "oversupply" of houses for sale or a marketing time of more than six months.
Other national lenders have distributed their own proprietary "declining markets" lists. GMAC-ResCap of Minneapolis even has a Web site allowing loan officers to type in a ZIP code and instantaneously learn whether the company ranks the area a D, C or lower risk. Although the public is not supposed to see the site, one mortgage company executive provided me with an access link.
In late January, a ZIP code for McLean, Va., - a high-income, high-cost residential community and home of mortgage investment giant Freddie Mac - was rated a high-risk D. The upscale residential neighborhood in northwest Washington, D.C., where Fannie Mae, another mortgage investor, has its headquarters was rated at an elevated risk of C.
Ironically, restrictions imposed by Fannie Mae late last year have prompted lenders to compile area by area risk ratings and impose down payment penalties. In a notice to lenders on Dec. 5, Fannie Mae said all loans delivered after Jan. 15 of this year on properties located within "declining" areas would be subject to 5 percent higher down payment requirements. The company's own electronic underwriting system had begun flagging selected markets as high risk in summer. Fannie Mae also strongly encouraged lenders to use "supplemental" data sources to come up with their own risk-ratings by market area.
Critics say that imposing higher down payment standards or other penalties for applicants in an entire county, metropolitan area or ZIP code is unfair to homeowners and buyers whose properties are located in sub-markets or neighborhoods within those jurisdictions that may not be declining in value, or not by enough to justify punitive underwriting requirements.
Ted Grose, president of 1st Mortgage Advisors Inc. in Los Angeles, said labeling entire counties as "declining" is "ridiculous - it totally fails to distinguish between areas where prices are rising or relatively stable, and other neighborhoods or communities where they are not."
David Berenbaum, executive vice president of the National Community Reinvestment Coalition, a consumer advocacy group active in litigation against subprime mortgage companies, said that "sound underwriting has nothing to do with geography. It is based on the income and qualifications of the applicant, and the valuation of the property by a professional appraiser."
"Anything else," said Berenbaum, "runs afoul" of federal fair lending and civil rights statutes. "It is redlining."
Paul Skeens, head broker for Carteret Mortgage Corp. in Waldorf, Md., said he had observed that lenders' county and ZIP code designations "have their heaviest impacts on areas with high proportions of minority groups and people with moderate incomes who bought houses" with low and no-down payment programs during the first half of the decade.
Labeling these areas as "declining" and then imposing higher down-payment requirements "becomes a self-fulfilling prophecy," said Skeens. "People can't buy there because they need more cash up front, the houses don't sell, and prices go down."
In an interview, Brian Robinett, chief credit and operations officer for wholesale lending at Countrywide, vigorously rejected the criticism. Countrywide's risk-ranking list distributed Jan. 25, he said, is based on comprehensive data on prices, sales and other indicators spanning 12 to 18 months.
"It would be hard to make the case (of redlining) against" the company's ratings. After all, according to Robinett, a wide variety of property types, income levels and ethnic groups are "equally affected" by every risk ranking. He cited the Los Angeles area as an example, with "Beverly Hills on one extreme" and lower-income, more heavily minority communities within the county on the other.
The takeaway for the time being on this issue: If a major lender has tagged your ZIP code, county or entire metropolitan area with a scarlet letter - and they exist in virtually every state, including many in places generally assumed to have relatively healthy market conditions - you're going to need more cash up front. That will be the case even if the area risk designation has no real applicability to the house you hope to buy or finance.
Bay Area 'soft' markets
Countrywide Financial gave the following ratings to the nine Bay Area counties. The numbers mean the lender will likely require a larger down payment in Alameda, Contra Costa, Sonoma and Solano counties.
County Level
San Francisco 2
San Mateo 2
Santa Clara 2
Alameda 4
Contra Costa 4
Napa 3
Sonoma 4
Solano 4
Marin 2
E-mail Ken Harney at kenharney@earthlink.net.
This article appeared on page K - 8 of the San Francisco Chronicle
Sunday, February 17, 2008
Critical Considerations When Purchasing a Home!
Thinking about purchasing a home of your own? Keep these critical considerations in mind:
*How long you plan to live in the home? If you purchase a home and get a job transfer or decide to move after only a short time, you may end up paying money in order to sell it. The value of your home may not have appreciated enough to cover the costs that you paid to buy the home and the costs that it would take you to sell your home. The length of time that it will take to cover those costs depends on various economic factors in the area of the home. Most parts of the country have an average of 5% appreciation per year. In this case, you should plan to stay in your home at least 5 to 7 years to cover buying and selling costs. If the area you buy your home in experiences an economic up turn, the length of the time to cover these costs could be shortened, and the opposite is also true. *How long the home will meet your needs? What features do you require in a home to satisfy your lifestyle now? Five years from now? Depending on how long you plan to stay in your home, you'll need to ensure that the home has the amenities that you'll need. For example, a two-bedroom dwelling may be perfect for a young couple with no children. However, if they start a family, they could quickly outgrow the space. Therefore, they should consider a home with room to grow. Could the basement be turned into a den and extra bedrooms? Could the attic be turned into a master suite? Having an idea of what you'll need will help you find a home that will satisfy you for years to come.
*Your financial health - your credit and home affordability. Is now the right time financially for you to buy a home? Would you rate your financial picture as healthy? Is your credit good? While you can always find a lender to lend you money, solid lenders are more skeptical if your credit history is not good. Generally, a couple of blemishes on a credit report will make you a good credit risk and could qualify you for the lowest interest rates. If you have more than a couple of blemishes on your report, some lenders may still provide you with a loan, but you may just have to pay a higher interest rate and fees. Some say that you should refrain from borrowing as much as you qualify for because it is wiser not to stretch your financial boundaries. The other school of thought says you should stretch to buy as much home as you can afford, because with regular pay raises and increased earning potential, the big payment today will seem like less of a payment tomorrow. This is a decision only you can make. Are you in a position where you expect to make more money soon? Would you rather be conservative and fairly certain that you can make your payment without stretching financially? Make sure that whatever you do, it's within your comfort zone. *To determine how much home you can afford, talk to a lender or go online and use a "home affordability" calculator. Good calculators will give you a range of what you may qualify for. Then call a lender. While some may say that the "28/36" rule applies, in today's home mortgage market, lenders are making loans customized to a particular person's situation. The "28/36" rule means that your monthly housing costs can't exceed 28 percent of your income and your total debt load can't exceed 36 percent of your total monthly income. Depending on your assets, credit history, job potential and other factors, lenders can push the ratios up to 40-60% or higher. While we're not advocating you purchase a home utilizing the higher ratios, its important for you to know your options. *Where the money for the transaction will come from. Typically homebuyers will need some money for a down payment and closing costs. However, with today's broad range of loan options, having a lot of money saved for a down payment is not always necessary - if you can prove that you are a good financial risk to a lender. If your credit isn't stellar but you have managed to save 10-20% for a down payment, you will still appear to be a very good financial risk to a lender.
*The ongoing costs of home ownership. Maintenance, improvements, taxes and insurance are all costs that are added to a monthly house payment. If you buy a condominium or a townhouse, a monthly homeowner's association fee might be required. If these additional costs are a concern, you can make choices to lower or avoid these fees. Be sure to make your Realtor and your lender aware of your desire to limit these costs. If you are still unsure and want buy a home after making these considerations, you may want to consult with an accountant or financial planner to help you assess how a home purchase fits into your overall financial goals.
I am here to help!
Jean Powers Broker Associate, CRS, ASP, LTG, PMN, Windermere Welcome Home Please Remember ....I am never too busy for Your referrals! Successfully Serving Alameda County Since 1984
Economic Stimulus
President Approves Higher Loan Limits: On Wednesday (2/13), President Bush signed the economic stimulus package that includes a temporary increase in the conforming loan limits for mortgages backed by the GSEs (Fannie Mae and Freddie Mac) and the FHA. The new loan limits could rise to $729,750 in high-cost regions.
According to NAR, more than 85,000 REALTORS® contacted their senators urging them to support the increased loan limits and to pass the stimulus package.
REALTOR® Impact: Higher loan limits will have a direct positive impact on REALTORS®. The policy change will allow more buyers (both first-time and move-up buyers) to access loans with lower interest rates. Currently, most home buyers in high-cost regions (such as the SF Bay Area) must finance their purchases with non-conforming "jumbo" loans. The interest rates on these loans can be up to one percentage point higher than those that fall within the current $417,000 limit. Higher rates mean higher payments which could keep potential buyers out of the market. Lower raters will make access to capital easier and provide the incentive for buyers to get off the fence and into real estate.
Next Steps: We may see new loan products as soon as late April or early May. According to sources at C.A.R., the Secretary of the U.S. Department of Housing and Urban Development will have up to 30 days to finalize the actual amount of the regional loan limits. Once the limits are set, Fannie Mae and Freddie Mac will need to update their procedures to reflect the changes. Shifting from a national loan limit to region limits is a major change for both Fannie Mae and Freddie Mac. Regardless, our sources tell us that both GSEs want to implement the new limits as soon as possible.
CAR is not sure when the FHA will respond. However, they may be able to implement the new limits quicker than the GSEs.
This report is compliments of Bay East's Governent Affairs Director David Stark!
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