Realtors and other real estate professionals have known about this for at least a year.  It’s been written about in the real estate blogosphere for months. Now the mainstream press is starting to pick up on it.  Here is the headline in the Washington Post: Foreclosure Wave Threatens Stability of Hosing Market (note: the Washington Post website will archive this article after today and require registration to read it.  Registration is free!).

This story is not buried in the back pages. It is at the top of the newspaper on the front page.  The Washington Post thinks it’s that important.

You should really read the article for yourself but here’s the gist:

• Many, many more home owners are becoming seriously delinquent with their mortgages.
• Banks have been working through the foreclosure process which can take as long as a year.
• Once this “shadow” foreclosure market oozes out into the market these foreclosed homes will further depress home prices
• This foreclosure mess is not short term.  It is expected to take at least three years for the homes to be released to the market and then bought by other home buyers

It’s a mess.  We can wring our hands, worry and fret. However, we cannot change reality and when the mainstream press starts to pick up on this stuff and give it prominent coverage, we would be well advised to sit up and take notice.  The Washington Post is not some rogue blogger sounding alarmist.

Here’s Part of the Solution

If you are a home seller with equity in your home, take note.  If you are a home seller with compelling plans to move — job relocation, retirement, assisted living, etc. — take note.  You cannot and will not be able to price your home at a level where it will not sell. Home sellers with equity in their homes will be “taking a hit” on their equity. This is sad.  It’s not fair.  It is reality.  Pricing a home above market levels is a recipe for a prolonged home sale (months and months and months of sitting on the market without an offer to purchase).

The sad reality of the current economic situation with increased unemployment combined with this coming foreclosure wave combined with extremely strict mortgage guidelines (i.e., a tight credit market) is that home prices will continue to feel substantial downward pressure for a long time to come.  In other words, at this point in time — Spring 2010 — we are probably at the top of a housing market that will continue to falter.

One of the “free samples” of a Realtor’s services we provide to Sellers is the CMA — the Comparative Home Analysis — sometimes referred to as the Competitive Home Analysis.  No matter what you call it, the Realtor takes some time to do some research into what a particular home might sell for given current market conditions, location and condition of the home.  Lots of factors come into play during the research, not the least of which, is the Realtors personal experience both with the area and in the profession, generally.  An experienced Realtor will be pretty close, if not dead on, when determining a recommendation for a selling price.

All that said, Realtors are not appraisers.

I take that back.  Some Realtors are appraisers.  They may have been appraisers that decided to help people buy and sell houses or they may have just decided on a change in career.  Sometimes, Realtors decide to go through the process to get licensed as appraisers, too.  However, the vast majority of Realtors are not appraisers. So, even though an experienced Realtor will, through their own research and experience, recommend pricing to a home seller, it is the appraiser that will determine the valuation for the house for the mortgage company the buyer is using.

The Buyer’s Perspective

Everyone knows that home sellers want to sell their homes for the highest possible price (we’re not talking bank owned foreclosures or short sales). We also know that home buyers want to purchase their home for the lowest possible price.Thus, an experienced Realtor working for the buyer will perform a CMA independently so they can advise the home buyer about strategies to structure an attractive offer.  Again, the CMA prepared by a Realtor working as a buyer’s agent should be pretty darn close to true market value.  What the home buyer offers is a different story.

Regardless of what the home seller and home buyer may agree upon, if the home buyer needs to obtain financing, the mortgage company, bank, or credit union will not (repeat: will not) provide a mortgage to the home buyer for more than the market value of the house as determined by a professional, licensed appraiser.

Many times the appraised value of the home comes in very near the contract price (the price agreed upon by the home seller and home buyer).  Sometimes, it comes in higher.  Some examples include:

• estate sales — the heirs just want to sell the house and be done with it
• divorces — there may be pressure for one of the parties in the divorce or the courts to sell the property
• job relocation — a home owner may not want a vacant property or the mortgage on home they aren’t living in
• illness — a home owner may need to move into a long term health care facility assisted care facility and need to sell the home to pay for it

One particularly sad reason homes may appraise for more than the contract price is that the home seller has over priced the home initially in the hopes of obtaining a price higher than the market will bear.  The house sits on the market for an extended period of time.  At some point, the home seller really either needs to sell the house or has just tired of the constant interruptions to their life by potential home buyers.  The home seller will then either lower their asking price substantially to attract a home buyer or they will accept a “low ball” offer just to be able to move on.

Mr. Market Calls The Shots

The sad truth about home pricing is that neither the home seller, the home buyer, the Realtor nor the appraiser control the price of the home.  The market does. Many economists call this the “invisible hand” — market forces that are not fully understood create the environment for fair value. As much as a home seller wants to sell their home for a high price  and as much as a home buyer wants to purchase the same home for a low price, it is the market that determines the price.

That’s why we saw such wild fluctuations in home prices over the last ten years. Home prices went wildly up because, oddly, the market was supporting the price appreciation (due to exotic mortgage products, mostly).  Now, market value has fallen because  a large number of home buyers can no longer pay their mortgages making huge numbers of homes in distressed condition available for sale at bargain basement prices. Simultaneously, credit has become extremely difficult to obtain reducing the potential home buyer pool even more.

The market has spoken.

Check out the Real Estate Market Trends for your area .  Just click here.  You will get a totally FREE report e-mailed to you.

According to the National Association of Realtors, the organization that keeps track of such numbers, existing home sales (the type of homes that you and I live in) dropped by 7.2% in January 2010.  Although the numbers are up slightly from a year ago and prices are starting to stabilize, the report also points out the difficulty that moderate income home buyers have in obtaining a mortgage. The article quotes Vicki Cox Golder, President of the National Association of Realtors:

“First-time buyers and others who need a mortgage are increasingly losing out to all-cash investors for the best bargains in many areas, particularly for foreclosed homes where cash is king,” she said.

Lawrence Yun, Chief Economist of the National Association of Realtors points out:

“Most of the completed deals in January were based on contracts in November and December. People who got into the market after the home buyer tax credit was extended in November have only recently started to offer contracts, so it will take a couple months to close those sales,” he said. “Still, the latest monthly sales decline is not encouraging, and raises concern about the strength of a recovery.”

Believe it or not, the National Association of Realtors really tries to put a report like this in the best light.  But the facts are the facts.  It really doesn’t look good for a strong, robust or quick recovery for the housing market.  Rising mortgage interest rates, difficulty home buyers have obtaining mortgages and real estate investors with cash buying up the bargain basement home are making it a difficult road.

The home buyer tax credit will expire in about 60 days and that will decrease the number of motivated home buyers. It ain’t a pretty picture.

If you need expert advice or some help buying or selling your home, give me a call at 240-417-9100 or e-mail me.

There has been much brouhaha about the first time home buyer tax credit of $8,000 and the existing home owner “move up” tax credit of $6,500.  Well, that’s all well and good but here’s a news flash.  You can’t get the tax credit if you can’t get a mortgage to buy a house.

First Time Home Buyer Blues

For the first time home buyer getting a mortgage is not as easy as it sounds.  You need sterling credit, cash reserves (at least enough to make a 3.5% down payment) and verifiable documentation that shows you can repay the loan.  Back in the old days you could apply a little smoke and mirrors and get a mortgage.  Not so nowadays.  Banks, credit unions, mortgage companies of all types are putting people through the ringer in order to get a mortgage.  Then, if the house doesn’t appraise at the contract price or some loan underwriter has a bad hair day, you could be screwed anyway.

What If You Own A House?

For the existing home owner, you still need all the stuff a first timer needs — great credit, cash, proof that you can repay the loan.  The added kicker for existing home owners is that they may need to sell their house in order to qualify for a mortgage.  Back in the old days, this was easy.  Put a sign in the yard and wait for the multiple offers to come in. Today, it’s not so easy.  You have to price your home aggressively to get a buyer interested and if your existing mortgage is too close to actual market value.  Well, you’re screwed, too.

Many times, if an existing home owner wants to purchase another house or “move up”  they’ll need to get the Seller of the “move up” house to take a home sale contingency which ain’t very likely.  Sure.  You might get lucky and a good Realtor (such as myself) will most definitely go to the mat for you in order to get the home sale contingency approved by the Seller through their listing agent but it won’t be easy.  Meanwhile, if you get a buyer for your home you have to cross your fingers and pray that the buyer’s mortgage will go all the way through to the day of settlement and you get your check so you can buy your “move up” house*.

*note: existing home owners don’t really need to “move up”.  They can move down like from a single family home to a condo or whatever.  They can move sideways like from one area to another but the same type of house.  It really doesn’t matter what type of house you buy.  If you have owned a house for five consecutive years out of the last eight years you may qualify for the $6.500 tax credit (until April 30th).

It’s All About The Mortgage

So if home sellers all around the nation are wondering, “Where in the world are all these home buyers?”  The sad answer is that they may want to buy your house but not be able to get a mortgage which means they aren’t buying squat and there will be no tax credit, either.  This, unfortunately, is the dirty little secret about the housing stimulus.

It’s tough out there. Give me a call at 240-417-9100 or e-mail me and let’s see if we can “get it done”.

I suppose that after ten years of helping people buy and sell homes that I shouldn’t be surprised at anything. But, I am.

Even though, a house, town house, condo, duplex or whatever you want to call your home is probably the single largest investment of time and money most people will ever make, I find that there are tons of people who think the process is similar to buying a car from the used car lot or a pair of jeans at the local WalMart.

I’d Like That Home Over There. Is It On Sale?

Potential Home Buyer — this gentleman found my name somewhere. It could have been the Internet. He is calling about a home I have listed. This means I represent the Seller and the Seller’s interests. Anyway, this potential buyer really isn’t sure who I am. He asks if I live there or I’m the owner or what. I let him know I’m the Realtor for the Sellers of the home who still are living in the home. The guy starts to ask all kinds of questions like:

1. What’s the home “worth”? Answer: the listed price.

2. How much did the owners pay for it? Answer: that doesn’t matter because only today’s market value matters.

3. Will the owners help with down payment and/or closing costs? Answer: The Sellers will consider any written offer. Perhaps, Mr. Buyer, you should find a Buyer’s agent to represent your interests and prepare an offer.

The conversation went on for about two more sentences before I really needed to politely but firmly disengage. You see, in this case, I represent the Seller. I don’t have the authorization to make guesses at what the Seller might or might not be willing to accept. Even if I did have some instructions from the Seller, verbal agreements are worth zilch.

1. What does the Buyer’s financing look like?
2. When does he want to settle?
3. What contingencies are likely to be included in the offer?
4. This particular Buyer asked about assisting with a down payment. That doesn’t exist anymore. Unless you’re eligible for a VA mortgage, you need a minimum of 3.5% cash for a down payment. It can come from a friend, relative, even your church but it can’t come from a home seller.

Long story short. This Buyer had no clue as to how to buy real estate. His ducks are not in a row.

The Sad Truth

The sad truth is that most home buyers have very little idea on what the process is to buy a home.  They go on the Internet.  They may even plug in  a few numbers in any number of mortgage calculators available on the Web. They look at homes and they think they’re ready.  They’re not.  Home buyers really need to focus on:

1. Where, exactly, they want to live.  “Anywhere” “Near Metro” “Anne Arundel County” are not good answers.  There are literally hundreds of homes even within micro categories.
2. How much of a mortgage do they qualify for. Mortgages are getting harder and harder to qualify for.  Sterling credit scores, cash reserves, massive documentation and verification of financial ability.  All this is required to get a mortgage.  If you’re short in any one area.  Fogedaboutit.
3. Once you’ve talked to a mortgage professional about how much you can qualify for, you need to think about exactly how much you want to pay per month.  The principal and interest are not the only things.  Property taxes are rolled into your mortgage payment. Home Owner’s insurance is rolled into your mortgage payment.  Are there Home Owner Association dues?  Condo Fees?  All this is considered.

Bottom line: buying a house is not like buying a car or going through the checkout line at WalMart.  You need to have your ducks in a row…or it ain’t gonna happen for you.

Would you like to get your ducks in a row?  Give me a call at 240-417-9100 or e-mail me and I’ll help make sure your ducks are lined up and you’re ready to purchase you next home.

The Federal Open Market Committee, a component of the Federal Reserve System, concluded a two day meeting in January.  The outcome of the meeting was that the Fed will keep their target rate near 0% and they will end the purchase of mortgage-backed securities on March 31, 2010.

First, let’s get one misconception out of the way. The Federal funds rate does not mean that mortgage rates will be near 0%. The federal funds rate and mortgage rates are not directly related.  The federal funds rate is meant to control economic growth.  Mortgage rates are driven by the price of mortgage-backed securities. If the two were proportionate than the spread between the two rates would be linear over the years,  However the spread between the two rates has varied significantly over the years .  So, keep in mind that these two rates move independently and that the federal funds rate does influence mortgage rates in the sense that the supply and demand of mortgage-backed securities is affected by economic growth.

More significant is that the interest rates could rise after the Fed pulls out of the purchase of their $1.25 trillion of mortgage-backed securities.  That’s right, $1.25 trillion!!  There are really two schools of though with regard to the impact on the housing market.  Optimists will tell you that investors searching for higher-yielding securities will find the government-backed mortgage-backed securities a bargain given alternative investments.  Pessimists say that the end of this program will cause interest rats to rise a full percentage point, which could take 30-year conforming rates up to 6% (from 5%, right where rates were before the Fed began this program).  In the coming weeks we should have some indication on how the end of the Fed purchases will affect interest rates since thy have already slowed its average weekly net purchases of the mortgage-backed securities from $21 billions to about $12 billion.

Many thanks to Mark Westcott of Corridor Mortgage Group for providing this post.

The Federal Housing Administration (FHA) has announced plans to increase the amount of up-front cash paid by new borrowers and to require higher down payments from those with the poorest credit.

A Little History

Prior to 1983 FHA loans required the borrower to pay an annual mortgage insurance premium (MIP) of 0.50% of the principal balance per year. In 1983 President Reagan initiated an additional premium known as Up Front MIP (UFMIP), paid in a lump sum at closing. The premium equals 2.25% of the loan amount and is due at closing.  The premium could be financed into the loan. On January 1, 2001 the UFMIP was reduced to 1.50%. On October 1, 2008 the UFMIP was raised to 1.75% for purchase transactions.

FHA regulations required the borrower to invest 3% of the sales price which included a minimum 2.25% down payment. The seller was allowed to contribute up to 6% of sales price towards the borrowers settlement costs.

Fast Forward to Today

Effective January 1, 2009 the down payment requirement was raised to 3.5%.

The new policy changes would increase the UFMIP from the current 1.75% to 2.25% of the loan amount. Borrowers with a credit score of less than 580 will have to make a down payment of at least 10%. (note: It should be noted that the policy of most lenders is to require at least a 620 credit score to be approved for an FHA loan.) Under the proposal the amount the seller can contribute to the borrowers closing costs will be reduced from 6% to 3%.

The new polices are expected to be implemented starting this spring.

Before the “subprime crises” FHA’s loan volume had fallen substantially. FHA current backs 30 percent of all loans for home purchases and 20 percent of refinanced loans.

For more information go to the FHA Press Release

Thanks to Alan Gross of Prime Lending for providing this timely information

Check out the Real Estate Market Trends for your area .  Just click here.  You will get a totally FREE report e-mailed to you.

The FHA (Federal Housing Administration) is preparing to make some changes to their requirements for home buyers and the mortgages they essentially guarantee.

Because of recent default rates — people not paying their mortgages — on FHA backed mortgages (as well as mortgages, in general), the reserves have fallen way below those mandated by Congress and if not replenished, the FHA may require a taxpayer bailout along the lines of the rest of the financial services industry. This is not a good thing.  So, in order to shore up their reserves, the FHA is making some changes:

• initial or “upfront” payment of the mortgage insurance required will jump from 1.75% to 2.25% of the loan value. Depending on the amount of the loan, this jump could be significant.  However, the FHA is considering spreading this out into an annual fee over the life of the mortgage.  This will ease the pain a little and it will also increase the monthly mortgage payment.
• reduce the amount the home seller can contribute to the home buyer’s closing costs from 6% to 3%. Typically, moderate income home buyers have very little cash reserves to purchase a house.  Down Payment Assistance programs have gone away so it is now mandatory that the home buyer produce the 3.5% needed for the minimum down payment. Closing costs — things like lender fees, title company fees, transfer and recordation fees required by State and County governments — may add up to as much as 5% of the sales price of the home.  Add in any points the home seller may want to pay on the home buyer’s behalf and it’s easy to get to 6%.  Now, it looks like the home buyer is going to have to come up with some additional cash.
• an increase in the down payment requirement from 3.5% to 10% for low credit score borrowers.  It can be argued that folks with credit scores of 580 and below are extremely high risk borrowers who would be the first to walk away from a home in times of economic distress.  There may be some mitigating circumstances such as an illness or a messy divorce.  However, if someone has a score below 620 it may be worthwhile to require a higher down payment.

More Skin in the Game

All of these changes including another down payment requirement, this one from 3.5% to 5% for everyone, is all in the name of forcing home buyers to have “more skin in the game”.  The thinking is that during the early go-go 2000s many home buyers bought homes they couldn’t afford with very little or no money of their own.  They didn’t appreciate the true consequences of the mortgages and the obligation to repay the mortgage.  As a result, when things got tough, they just walked away.  No loss.  No big deal.

Since FHA backs a lot of mortgages, they ended up paying the banks for the bad loans.  The more mortgages that went south, the more money that came out of FHA reserves.  Now, it’s time to pay the piper.

Good News, Bad News

The good news, from my point of view, is that these new requirements will require more responsible lending practices. It will also cause home buyers to be more responsible with their credit and encourage them to save more for what will be the largest purchase in their lives.

The bad news is that it will shrink the pool of home buyers, especially in the moderate income area.  Home prices may have to decrease more in order to attract home buyers that will now need more cash to make a home purchase.  After all, these changes are all percentages of the mortgage amount which is related to the sales price of the home.  It’s like a row of dominoes.  When one thing changes, everything else in it’s path changes, too.

The bottom line is that selling and buyer a home is getting more difficult. If there was any remote fantasy of going back to the days of rapid price appreciation or being able to sell your home in a week, these changes by the FHA will banish that fantasy forever.

Check out the Real Estate Market Trends for your area .  Just click here.  You will get a totally FREE report e-mailed to you.

Yesterday, I attended my second workshop on new RESPA (Real Estate Settlement Procedures Act) guidelines for mortgage companies and title companies.  The long and short of it is that the Department of Housing and Urban Development (HUD)  is requiring lenders to provide a Good Faith Estimate (known ans a GFE)  to potential home buyers/ borrowers within three day of a formal application for a mortgage.  This Good Faith Estimate is supposed to be able to show, in a clear and understandable way, what the specific costs are for obtaining a mortgage.

So far, so good.

The challenges arise from the fact that a lot of the costs of purchasing a house are not the lender costs.  There are the title company fees and the transfer and recordation fees required by the State and County where the house in being purchased.  However, the lender is the one that will be responsible for getting things right..  The real confusing part of all this is that certain costs shown on the Good Faith Estimate can be within 10% of the final costs shown on the settlement sheet (HUD-1) at settlement.  Other costs must be correct to the penny and still other costs don’t have any control over whether they are even close.

On top of all of this, if the home buyer /borrower decides to use a different title company from the one used to ascertain costs on the Good Faith Estimate than all bets are off and the lender is completely off the hook for everything.  Not that it matters anyway because there are no penalties if the lender gets it wrong.  Yes, if some of the costs are more than 10% off (on the upward side), the lender is mandated to "make it right" within 30 days of settlement.  However, if they don’t, well…..maybe a letter to your Congressperson will help.

The Day of Settlement on Your New Home

As confusing as the Good Faith Estimate may be it doesn’t hold a candle to the “new and improved”  HUD-1.  This is the sheet that shows all the costs associated with the purchase and sale of the house — what the home buyer has paid and what the home seller has paid. Before January 1, 2010, the HUD-1 was not the easiest document ot read but, with the help of the settlement attorney, you could at least see what money went to what fee.  Now, there is all kinds of strange calculations and the numbers are shown as aggregate (the sum of smaller numbers) totals or broken into different sections.

In short, it’s confusing as hell for a seasoned professional such as myself.  I can’t imagine what it’s going to be like for the first-time home buyer who is nervous and anxious anyway.  It’s all completelyb new and even for people who have owned a few houses will wonder what the hell happened.

The Swinging Pendulum

This is all a reaction to the wild real estate bubble we had in the early 2000s.  Lots of people cried “Foul!” when the home they bought lost a ton of value or the mortgage product they took out to buy the home all of a sudden became unaffordable because of adjusting interest rates.  Of course, a lot of the misbehavior from the early part of the 2000s has led to the massive wave of foreclosures and short sales.  No doubt. Reform was needed.

This type of reform is a type of overkill and, undoubtedly, will cause more grief than relief.  But, it’s here and we have to deal with it.  So, Realtors, lenders and title companies are doing their best to learn and comply with the new RESPA regulations.  HUD is actually allowing 40 days for everyone to get up to speed.  I don’t know that it will help.  Even if the real estate professionals involved in the  process get a handle on what’s going on, the home buyer is still going to be confused.  After all, we [the real estate professionals] do all this for a living.  We see it many, many, times.  The home buyer sees it once about every seven years or so.

In fact, the HUD Frequently Asked Questions about the changes now runs 52 pages — take a look here!

Check out the Real Estate Market Trends for your area .  Just click here.  You will get a totally FREE report e-mailed to you.

Effective for all sales contracts dated on or after February 1, 2010:

• Certain property may be resold and financed using FHA insured financing without waiting 90 days.

FHA has temporarily waived the 90 day wait period on certain transactions. These recently purchased homes may be sold and financed with FHA insurance.

• Private sellers and investors are now eligible to take advantage of this waiver.
• These transactions must be arms-length, with no identity of interest between the buyer and the seller or other parties participating in the sales transaction.
• In cases where the sales price is 20% or greater than the seller’s acquisition, the lender must justify the increase in value with supporting documentation of renovation, repair and rehabilitation work.
  • If no such work was performed the appraiser must provide an appropriate explanation of the increase in property value since the prior title transfer.
  • The lender must order a property inspection and provide that report to the home buyer. Buyer’s may be charged for the cost of this inspection.

There is much more detail to this wavier and if you have transactions meeting this guideline you are advised to read the waiver in its entirety here.

This should free up the sale of a number of properties that were being hampered by the 90 day restriction.

Thanks to Alan Gross of Prime Lending for providing this timely information