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Mortgage Mania 19 - The Jumbo Strikes Back

Amid all the celebration and hullabaloo associated with the recent drop in conforming interest rates as a result of the Treasury Department taking over management of GSE’s Fannie May and Freddie Mac, there has been scant analysis of the elephant in the room, namely Jumbo (aka non-conforming) loans that are part and parcel of home purchasing here in Silicon Valley.

The GSEs hold or have securitized nearly half — roughly $5 trillion — of all mortgages in the U.S., and in the current environment with private lender constraints, they account for the vast majority of all new mortgages in California.

 This bailout (oops, did I say bailout?) removes much of the risk to lenders of writing mortgages for under $729,000 locally, decreasing to $649,000 next year, because they can resell these loans to the government backed and now managed GSE’s.

But what about loans over $729,000? Well, Wall Street and the secondary market will still be willing to buy those that are considered low risk (excellent credit score, low loan-to-value ratio, verifiable income), but they will demand a risk premium for those loans, meaning that rates are likely to go up, taking us back to the bifurcated market for rates that we have seen in previous years.

 On his way to the SILVAR Golf Tournament yesterday, co-contributor and local mortgage banking hotshot of Absolute Mortgage Bank in Palo Alto gave this quick analysis of where he sees rates going (paraphrased here):

If you know you can sell off a loan to a government backed agency, you have very low risk, so you demand a low interest rate. However, as risk increases you will demand a greater “risk premium” to hedge against not being able to sell that loan, or the buyer defaulting on that loan. Right now we are seeing investors who are willing to lend the 20% to take a buyer from a 20% down, 80% loan to a 100% loan, but at 15% with 5 or 6 points. That’s expensive money, which is why it is dubbed “hard money”, but it offsets the risk to the lender.

 Eric thinks we could see Jumbo rates heading to the 8 - 9% region, which is still lower than in the 80’s, but the difference between a 6% loan and a 9% loan on $1,000,000 is $2500 a month just in interest.

 Let’s do some math. If you have an 80% mortgage on a median priced home in Palo Alto ($1,921,214, source Altos Research). That is a mortgage of $1,536,971, and payments increasing from $7685 @ 6% to $11,527 @ 9%. That’s a lot of $4.25 a gallon gas!

 So, if you are planning on buying a new home and you need to borrow more than $729,000 you may want to get out there looking sooner rather than later.

 To learn more about the takeover of Fannie Mae and Freddie Mac and what it means to your home purchase, check out a new video featuring California Association of Realtors Executive Vice President Joel Singer at http://www.car.org/newsstand/video-js-gse. In “Fannie and Freddie: Why They Matter to You,” Joel explains the often confusing but critical role Fannie Mae and Freddie Mac play in the housing market in clear and concise terms.

Thanks for reading . . .

Tags: 2008 loan limits, 2009 interest rates, 4---mortgage-mania, bailout, Fannie Mae, Freddie Mac, interest rates, Jumbo Loans, mortgage bailout, treasury

Mortgage Mania 18 - Can You Say Taxpayer Bailout?

What The Government Seizure of Fannie Mae and Freddie Mac Means To You

Unless you have been hiding under a rock the past couple of days, you couldn’t miss the announcement that the U.S. Department of the Treasury has placed government backed mortgage companies Fannie Mae and Freddie Mac into a conservatorship. Under the terms of the deal, the federal government is authorized to take up to an 80 percent stake in the companies, and, as part of its duties under the conservatorship, will review both Fannie’s and Freddie’s financial condition quarterly, as well as inject money into the operations as needed. 
of Stern Mortgage in Palo Alto had this to say about the Treasury Department’s move.

“To promote market stability, the companies will be allowed to buy more mortgages through the end of 2009. However, starting in 2010 the number of mortgages they own will gradually be reduced at a rate of 10% per year, eventually stabilizing at about $250 billion.”

 As part of this weekend’s action, both CEOs were relieved of their duties and Herbert Allison, former Merrill Lynch vice chairman, and David Moffett, former U.S. Bancorp CFO, were selected to lead Fannie Mae and Freddie Mac, respectively.

The markets cheered the move with the NYSE and NASDAQ rallying on the news, and mortgages rates for conforming loans (under $650,000 in 2009) fell almost half a point.

 All great news, mortgage rates fall, and the housing slump is averted, right? Not so fast there partner . . .

In a statement released today by the California Association of Realtors (C.A.R.), concern over the long-term impact of the move was expressed with the following cautionary forecast:

“Without an institutionalized mortgage-backed securities market, mortgage capital eventually will be less predictable and more expensive, and adjustable-rate mortgages could become the standard loan for home buyers, as could higher down payment requirements. The 30-year, fixed-rate mortgage as we know it will no longer be readily available for most home buyers and may effectively disappear. The result could be a dramatic decline in homeownership rates in California and across the nation.”

C.A.R. is concerned that the Treasury, and Fannie Mae’s and Freddie Mac’s new CEOs, will overreact and change the mission and role of the GSEs. Wall Street and investors are understandably reluctant to buy mortgage backed securities (MBS) that are not either originated from or guaranteed by Fannie or Freddie.”

I added the underlining for emphasis because what nobody is talking about is JUMBO loans. Those mortgages above $729,000 (over $650,000 in 2009) that are part and parcel of almost ALL sales of single family homes here in Silicon Valley (the median home price in Palo Alto this week is: $1,921,214, courtesy of Altos Research).

In summary, while this is a good move for conforming loans, and the majority of potential homebuyers across the country, high-cost areas like Silicon Valley may once again be left out in the cold.

Stay tuned for our next edition of Mortgage Mania - The Jumbo Strikes Back

Thanks for reading . . .

 

Tags: bailout, California Association of Realtors, Fannie Mae, Freddie Mac, housing market, housing market turnaround, Mortgage, Palo alto housing market, silicon valley economy, silicon valley real estate

Good News About Real Estate in the Mercury? Well Sort Of

Long-time readers know that I do my newspaper reading online via the New York Times. In a throwback to a quieter time, I do subscribe to the San Jose Mercury News on Sundays as we like to peruse the articles and share witty banter about the headlines over morning coffee. In an interesting twist, I also receive the paper on other random days of the week . . . but I digress.

When I picked up the paper on Labor Day (Second Sunday?), the headline “Home Sales Raising Hopes” bravely attempted to be seen over the front and center HURRICANE HITS GOP main headline. What’s this I thought, positive news about the housing market from the Merc? Really?

I have grown weary and wary of the Merc and its drumbeat of foreclosure of the week, gloom and doom, and reinforcing that real estate is local, and my market in Palo Alto varies just a bit from south San Jose. If you don’t believe me, visit Altos Research and compare the chart for median home price over the last couple of years in these two cities. The results may surprise you . . .

The Merc got my hopes up with an intro and a couple of quotes from brokers saying they were expecting an upturn in sales in the Fall after activity was so low in the summer, and there is usually an upturn in the fall. There is some back and forth, and the article pretty much shot down the “fall uptick” conventional wisdom. Again, Altos to the rescue showing inventory and sales actually DO pick up in Palo Alto fairly consistently every fall before slowing down over the holidays.

To see the article on its entirety, click here to visit the Mercury online. For charts and stats galore, visit the Market Reports page on my website, now in Single Family and Condo!

Thanks for reading . . .

Tags: 2008 real estate market, home prices, Local information, palo alto home prices, palo alto market, San Jose Mercury

Timing the Market, A Banker’s Viewpoint

Credit for this post really goes to 3 Oceans contributor Eric Trailer who sent me this content in a letter this week. My clients got it last week, and the blogoshpere can now benefit. We can assume that Eric has better things to do on Labor Day than blog. I’m guessing something involving his lovely wife and son . . .

To see current market data and price trends over the past year for local communities and confirm or refute Eric’s prognostications on the local market in Palo Alto and the surrounding communities,

CLICK HERE to see real-time market data, courtesy of our friends at Altos Research.

As you have likely been hearing, there continues to be more and more evidence that it will cost prospective home buyers more to purchase a home in select areas of the Bay Area as they allow time to go by.
Why? Let’s look at the basic reasons, then review an example:

1.        The median price across the board in Palo Alto and the surrounding communities has risen since the beginning of the year.

2.        On a national basis, the trough of the market was reached in April.

3.        The conforming loan limit will DECREASE over $100,000 in 2009 to $625,000.

4.        Rates have risen about .5% since the beginning of the year, despite the increase in the conforming loan limit to $729,750

5.        Loan qualifications are becoming more restrictive with each passing week.

6.        More restrictions on loans and a tighter supply of money forces rates to go up

7.        Because loans require more work to process them (requirements today are 4x what they were a year ago), rates will go up.

8.        Inflation is the number one concern of the Fed, and should be the number one concern for all of us.

Let’s say for a moment that you agree that rates are on the rise, but feel as though prices may come down on a $1mm property today; thus, you want to wait. Let’s further assume that you are right and the future price is $950,000, but rates have increased .5% at that future time. Using 20% down, waiting just cost you an ADDITIONAL $117 per month-over $1,400 per year.

But now let’s be more realistic given the appreciation rates of desirable areas of the Bay Area. If rates increase and the $1mm home appreciates to $1,050,000, you are looking at an ADDITIONAL $550 PER MONTH-OVER $6,000 PER YEAR!

What’s the take-away here?   Price matters much less than true cost… My motto has always been that it always pays off to buy sooner than later, provided your holding period is greater than four years. And to prove that I walk the walk, I am happy to share my personal situation written as an article titled, “How to Afford a Home in Palo Alto Without a Trust Fund.”

Kindest regards,

Eric

To call Eric on his walking the walk comment, and get a copy of his article, “How to Afford a Home in Palo Alto Without a Trust Fund.”, click on his pretty picture over there in the contributor column to send him an email.

Tags: 4---mortgage-mania, absolute mortgage bank, mortgage rates, Mortgages, palo alto home prices, Palo alto housing market, palo alto market, palo alto real estate market

A Housing Rebound? - Looking for the bounce

CNN Money is a favorite consumer source for news and sensationalism about issues affecting us financially. A friend uses it as his homepage, and sent me this article on indications that the housing market is pulling out of its downward spiral. Judging by the commentary on the Yahoo news service that picked it up, most people think it is another self-serving article written by real estate agents who want to further dupe consumers into buying homes and further leveraging them selves with unnecessary debt. There, I said it, so you can save your comments.

Here in Sillycon Valley, we are continuing to see variations on the Tale of Two Cities theme, with markets like Palo Alto and Menlo Park holding up strongly (click the links to see current market data), while prices in parts of Sunnyvale and San Jose have fallen off a cliff this year. We won’t mention Sacramento, because it’s not nice to kick ‘em when they’re down.

So, the key leading indicators for monitoring the health of your local housing market are:

1. Is the housing stock shrinking?
2. Are home prices falling at a slower pace?
3. Is it cheaper to rent than own?
4. Are houses becoming more affordable (relative to local incomes)?

Locally, we are still kind of bumping along. The current housing stock in Palo Alto is up slightly, but that isn’t unusually during the late Summer. If the trend continues through Fall, it may signal a trend.

Home prices have been stable here, so that is tough to measure, though the multiple-offer / overbid madness is definitely a rarity these days.

Depending on how you measure it, it’s still cheaper to rent than own, but tell that to my clients who were tossed into the housing market when the rental property was sold and they received a 60 day notice from the new owner.

Houses here are still unaffordable, but take a look at the chart at the bottom of the page and compare San Jose and San Francisco. It may be a good time to get into San Jose, especially if you understand foreclosures and short sales. If not, contact 3Oceans contributor Bart Marchioni, aka Mr. Short Sale.

Remember, real estate is local, and be careful what you read on the internet.

Thanks for reading . . .

Tags: 2008 real estate market, housing market turnaround, mortgage crisis, mortgage mania, Palo alto housing market

Mortgage Mania 17 - Foreclosures Inside The Bubble

Long-time Mortgage Mania readers, (aka Mortgage Maniacs) know that I’m an avid reader of the New York Times, so it should come as no surprise that I would have some comments on this article in the Friday June 6 edition regarding the continuing foreclosure crisis affecting consumers across the country.

Authors Bajaj and Grynbaum review some recent statistics on foreclosures, and then go on to predict another wave of foreclosures as the economy continues to slow and more consumers fall victim to layoffs and job cuts.

It’s easy to ignore these rumblings here in wealthy Silicon Valley where the local economy is still vibrant, even with nearly $5 a gallon gas, as it is still a minor impact on a budget with a $5,000 a month mortgage. It’s easy for us living in The Bubble of Unstoppable Real Estate (which I define as: Palo Alto, Menlo Park, and Los Altos, your mileage may vary) to say “it can’t happen here”.

Not so fast there pardner. A Short Sale in Atherton you say? It’s almost enough to make you drop your Grey Poupon.

This little number at 199 Selby Lane in Atherton recently listed by Lanny Dannenberg of Keller Williams is a short sale at $1,795,000. It has been on the market with a couple of different brokers for over two years, starting at $2,495,000 in March of 2006.

The good news is that the local market continues to be pretty strong, especially at the upper levels, above $3 million. Don’t take my word for it, check out this market data for the latest facts and figures on Palo Alto and surrounding communities.

Thanks for reading . . .

Tags: 4---mortgage-mania, Atherton, economy, foreclosure, new york times, short sales

Have we really hit bottom? Market statistics vs. media hype

As our resident expert, Kevin Boer noted in his April 1 posting, the housing market officially hit  bottom a couple of weeks ago. For those of you who  were  skeptical of his information given the  April 1 posting date, and Kevin’s well known reputation for satire and irony, the California Association of Realtors published some new market data yesterday (April 24) showing how real estate really is local, and that the local real estate market in Silicon Valley is humming along nicely, thank you:

In case you’ve been wondering why high-end real estate markets continue to perform relatively well:  One out of every 10,000 American families has an annual income greater than $10.7 million, according to two university professors who study the super-rich.  By their tally, there are some 15,000 Americans who fit into that category.  These individuals also are getting an increasing share of the economic bounty:  In 2006, the super-rich possessed 3.89 percent of total income, up from .87 percent in 1980 and the highest level since 1916.

Strong employment and wage growth are two factors that have helped the San Francisco Bay Area stave off the kind of home sales and price declines experienced in the inland regions of California.  For example, Santa Clara County residents earn nearly double the nation’s average weekly wage and surpassed Manhattan as the county whose residents take home the largest paycheck, according to the U.S. Bureau of Labor Statistics.  Santa Clarans take home an average of $1,585 per week, slightly more than Manhattanites, who earn an average of $1,544 a week.  San Mateo County ranks fifth in the nation at $1,322, while San Francisco is eighth at $1,286.  Nationally, the average is $818.  San Francisco ranked tenth in new-job generation, adding 18,000 jobs for the twelve months ending Sept. 30, 2007.

Despite the above, some worry that California’s technology sector may be in for another “dot bomb.”  But experts say technology and Internet companies are better prepared to weather the storm this time around.  Their reasoning?  Many Web 2.0 companies learned a lesson from their free-spending predecessors and have discovered ways to operate with fewer employees and at lower costs.  That appeals to venture capitalists, who have tightened their criteria but continue to seek companies with strong revenue models.

Lately, I have been describing the market as “upside down”, where I am seeing unusually strong sales activity in the over $3 million market, while under $1 million is about the same as last year, or a little off depending on the neighborhood. What is interesting, is the $1 million to $3 million market, what I call “tweeners”, because these homes are in-between the entry-level and high-end.

Gross simplification warning: Buyers of “tweener” homes have significant amounts of cash or equity to put down, but still need a mortgage, and often a significant one. As banks and other mortgage providers have tightened their lending guidelines from recent years, it has become harder to get a $1.5 - $2 million mortgage, and those have become more expensive. As a result, more people aren’t upgrading, or they are getting priced down from say, $2.5 million to $2 million. Thus reducing demand relative to supply and creating a soft spot in the market.

In my experience, in the $3 million and over market, Buyers have more cash, Euros, Rubles, Yuan, Dinars, stock, gold, trust money, etc. to use to purchase their new “executive home”, so they are less concerned or affected by interest rates and loan qualification hurdles.

Let’s hope that VC money mentioned in the article above keeps flowing so we can keep paying for our million dollar tract homes and $5 a gallon (you know it’s coming!) gas.

I know you will have an opinion or comment, share it here.

Thanks for reading.

Tags: 2008 real estate market, housing market, palo alto economy, palo alto real estate market, palo alto realtor, silicon valley economy, silicon valley real estate

As The Market Slows, Lawyers are Salivating, Part 2

Some of you will remember my post on the lawsuit in Southern California where the buyers of a home were suing their agent because they felt they overpaid, and the agent had acted to hide that information from them (Refresher available here).

This case had lawyers salivating, and brokers trembling, as it potentially could provide precedent and open the door to lawsuits by home buyers who purchased homes during the recent run-up in housing prices, and are now seeing their local markets stagnate or fall.

According to the following article released by the California Association of Realtors, the jury on the case found in favor of the real estate agent.

There was no mention of the issues that I flagged in my earlier post, namely that the agent didn’t share the appraisal or list of comparable properties with the client, or that he encouraged them to get their home loan through him and use his appraiser.

I’m sure that there are many real estate agents out there who also are great mortgage brokers. I’m not one of them. Frankly, I’m not smart enough to keep up with all the issues in real estate law and the local market, plus all the ongoing changes in the lending market.

Thanks for reading . . .

REALTOR® WINS HIGH PROFILE JURY TRIAL
After only two hours of deliberation yesterday, the jury unanimously vindicated a buyer’s agent accused by his clients of failing to disclose that two other homes in the neighborhood sold for less than what they paid. As a trial court case, this decision in Ummel v. Little is binding on the parties to the case, but has no binding authority for other cases. Moreover, the buyers may file an appeal.

This case involved a couple who bought a home in a coastal Carlsbad community in 2005 for $1.2 million. They regretted their purchase when they discovered that two other homes sold for about $150,000 less than theirs. They sued their real estate agent for negligent misrepresentation and breach of fiduciary duty. Their lawsuit grabbed national attention, given the recent downturn in the real estate market.

At the trial, the agent’s attorney argued that there were valid reasons these two other properties sold for less. One home, for example, had a lap pool which was unappealing to many buyers, and the sellers wanted to rent back the home for two years.

Tags: agent sued over negligence, carlsbad realtor lawsuit, realtor lawsuit

More Foreclosure News . . .Not Even The Rich Are Safe

I think we will file this under: “News of the Weird”, but I was stunned to see that even Michael Jackson has been unable to escape the clutches of the expanding foreclosure crisis. Apparently, The King of Pop’s has joined the thousands of homeowners across the country who are losing their homes to foreclosure.

Apparently, Jacko owes $24.5 million on the property and the county is planned to foreclose for non-payment of back taxes. The property is scheduled to be auctioned at the courthouse steps on March 19.

Michael - Contact our resident foreclosure and short sale expert, Bart Marchioni, right away. He can help you out.

For all you readers out there, help a reclusive, aging pop star out, go buy a 25th anniversary edition of Thriller. On sale now!

For CNN’s take on the story, click here.

Thanks for reading

Tags: foreclosure, michael jackson, neverland, short sale

Conforming Loan Limits Newsflash

I’d like to thank Kristen Emery at Princeton Capital in Palo Alto for providing me with the first bit of information that actually explains what the changes to conforming loans will mean to someone in Silicon Valley trying to buy a home.

A little light reading for you:

We have seen a whirlwind of legislative activity these past few weeks! There is much confusion surrounding the recentlypassed Economic Stimulus Package and higher loan limits. Unfortunately, the new law can be confusing to decipher, andnot everyone will benefit. For this reason, we have provided an outline below that clarifies what this new law means for youand how you can benefit from the higher loan limits. 

Description and Overview:An economic stimulus package just passed Congress on February 7, 2008 and was signed into law by the President onFebruary 13, 2008. This new law is effective immediately and includes a temporary increase in both the FHA andconforming loan limits to as high as $729,750 in high cost areas. This means that the interest rates on many mortgages willgo down because these loans are now eligible to be purchased by Fannie Mae and Freddie Mac or insured by the FederalHousing Administration (FHA). Previously, the FHA was only allowed to insure loans with balances lower than $200,160 -$362,790, depending on the county where the property was located. Also, Fannie Mae and Freddie Mac were only allowedto purchase loans with balances at or below $417,000. This resulted in limited options and higher financing costs for thosewith loan balances above these limits. The new law substantially increases these limits in high cost areas and opens upnew options and lower financing costs for many people. 

How to Determine “High Cost” AreasThere are two things you must know in order to determine if you are in a high cost area: 

1. Understanding the Formula

If 125% of the local area median home price exceeds $417,000, the temporary loan limitwould be that 125% of the median home price with a cap of $729,750. Here are threeexamples to illustrate this concept: If the median home price in your area is $375,000, 125% of that number is$468,750. Thisis above the current $417k conforming loan limit. Therefore, the conforming loan limit inyour area WILL change and go up to $468,750. This number is also higher than thehighest FHA loan limits, so therefore your FHA loan limit will also go up to $468,750. If the median home price in your area is $650,000, 125% of that number is $812,500.This number is greater than the maximum cap of $729,250. Therefore, the conforming loan limit in your area willincrease to highest allowable amount under this new law which is $729,250. (Our median home price is $612,000 for Santa Clara County). 

2. Determining the Median Home Price in Your Area

The Secretary of Housing and Urban Development (HUD) will publish the median house prices within 30 days of the billgoing into effect (30 days from February 13, 2008). HUD does not have any interim stats or information for us to use. However, the bill also states that HUD can use any commercially available data if they are unable to compile theinformation on their own within the 30 day timeframe. With that in mind, it is likely that HUD’s numbers will be relativelyconsistent with the data published by the National Association of Realtors (NAR), which already has a solid track record oftracking and publishing this information on a quarterly basis. Therefore, until HUD actually publishes their version of the median home prices, the most accurate way to get thisinformation today is to utilize the data that is published by NAR. Ironically, NAR just released their latest median homeprice update for the 4th quarter of 2007 on February 14, 2008! Contact me today and I’ll research your info and let youknow exactly what the median home price is in your area and how you can benefit from this information. 

What do all the dates mean?

There is some confusion because the bill has a provision that says the higher limits areonly effective for loans originated between July 1, 2007 and December 31, 2008. Inshort, the reason it is effective beginning July 1, 2007, is because the credit crisis startedto unfold in July and August of 2007. Mortgage market conditions rapidly deterioratedalmost overnight. Many secondary market investors suddenly refused to purchase loansthat couldn’t be sold to Fannie Mae and Freddie Mac. (For more info on how this processworks, please see the article entitled Saga of the US Mortgage Industry.) Unfortunately, many mortgage banks had already funded these loans in their ownportfolio or through their warehouse lines of credit. Their intention was obviously to sellthese loans on the secondary market after the loans were funded. However, the creditcrisis prevented them from doing so, and they were stuck holding these loans in theirportfolio. The July 1, 2007 date in the bill is designed to allow these lenders to unloadthese mortgages and sell them on the secondary market to Fannie Mae and Freddie Mac. 

However, the July 1, 2007 date has no bearing whatsoever on new refinance transactions!

In other words, it doesn’tmatter when the loan you are refinancing was originated. The old loan could have been originated in 2005, 2006 oranytime before or after July 1, 2007 and it would have no effect whatsoever on your current purchase or refinancetransaction.

If you are refinancing a new loan today, whether it is a purchase or refinance transaction, that loan issubject to the new limits set forth in the bill. 

The other date of December 31, 2008 means that the old limits will go back into effect after this year. In other words, now isthe perfect time to buy a new home or refinance your mortgage because after this year, your costs will be higher and youroptions more limited again. 

When does this all go into effect?

February 13, 2008 – immediately upon the President’s signature. Therefore, HUD is obligated to publish the median homeprices within 30 days of that date. However, Fannie Mae, Freddie Mac, and various wholesale lenders may have different policies as to how these new loans are going to be priced and underwritten.

 - - - Information provided by:

Kristen Emery

Princeton Capital

Tags: 2008 real estate market, 4---mortgage-mania, Conforming Loans, first-time buyer, Mortgage, Mortgage Forgiveness Debt Relief Act of 2007

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