If you are a reader of The San Jose Mercury News, or any other paper or media outlet, you know that there is a growing issue associated with home buyers who purchased their homes using subprime loans and are now facing foreclosure as they are unable to keep up with their payments when their rates adjust.
On Sunday, March 17, the San Jose Mercury News ran an article describing how an agent and lender with Century 21 Su Casa Realty violated a number of lending laws and ethical guidelines to get people to purchase homes which are now in foreclosure, in some case because the buyers couldn’t even afford the first payment.
While it is a stain on the already tarnished image of Realtors, it is easy for us in Palo Alto to say ‘what a shame, it won’t happen here’, or words to that effect. But, what is the effect of this issue on homebuyers in Palo Alto and the surrounding communities?
Rachel Van Emon with OPES Advisors, a financial services firm with offices in Palo Alto and San Mateo, recently sent me an article that discusses the effects of impending legislation and revised lending guidelines that will affect the ability of buyers to qualify for products like the interest only loans that so many of us use to buy our million dollar teardowns in Palo Alto and surrounding communities.
The highlights are:
- The Department of the Treasury has issued a Guidance on Guidance on “Nontraditional Mortgage Product Risks.”
- The Guidance specifies “nontraditional” as those loans allowing the deferment of principal and/or interest payments – not just sub-prime loans.
- The Guidance states that borrowers for these products are to be qualified at the “fully amortizing and fully indexed payments.” This means that qualifying payments will be bigger, and it will take more income to qualify.
- The new guidelines are to be in effect by 9/07. Some lenders have already adopted them, and many more will do so in the coming months.
- Virtually all lenders have cancelled their programs allowing 100% financing on a Stated Income basis.
- Guidelines have tightened around lending when other “risk factors” are present such as 100% financing, low reserves, high debt-to-income ratios and condo properties.
In short, it’s going to be harder to pay for that million dollar teardown in Palo Alto starting now, and especially in September.
The big question is whether these changes in lending laws will cool the red hot housing market we are currently enjoying, or if the Valley’s amazing ability to generate disposable incomes and wealth will overcome another hurdle to home ownership. Stay tuned . . .
The entire article is posted for your reading pleasure. Click here to view it.
Tags: Bad-Realtors, Century 21, Crooked-realtors, Deceptive-realtors, Dirty agent tricks, Financing-Process, Loan Application, Loan-Application, Mortgages, Negative Amortization, No Documentation (ND), No Income No Assets (NINA), No Ratio (NR), Option ARMs, Palo Alto, palo-alto-real-estate, Preapproval, Prequalification, Real estate, Realtors who give the business a bad name, Stated Income Stated Assets (SISA), Stated Income Verified Assets (SIVA)
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5 responses so far ↓
1 Julia Wei // Mar 29, 2007 at 9:56 am
I wrote about this very issue and predicted that “stated income” loans would become a scarce product. http://dirtlaw.typepad.com/blog/2007/02/trust_deed_inve.html
I think the bigger reason to care about what happens to subprime lending is to consider the bigger picture of how it will affect all taxpayer if another bailout is necessary. http://dirtlaw.typepad.com/blog/2007/03/californias_war.html
2 Kevin Boer, Realtor, 3 Oceans Real Estate // Mar 29, 2007 at 11:26 am
I don’t have the data, but I don’t think a lot of these $1 million Palo Alto tear downs are being bought with 0% down, stated income loans.
If the subprime issue does hit this market, it may be more indirect, such as condo owners in Mountain View who were intending to sell and then move up to Palo Alto not being able to do so because their buyer pool may have been largely 0% down, stated income folks.
A friend of mine sent an article describing this as the “Plankton” effect. Though Plankton are small and seemingly insignificant, they’re at the base of the food chain, and if they’re in trouble, the whole chain’s in trouble. If home buyer “Planktons” aren’t able to buy starter homes, then those in starter homes can’t move upmarket, and this creates a ripple effect.
Meanwhile, back here in the real world, multiple offers remain the norm in this area. It’s simply unbelievable the amount of wealth in this area and the continued demand for housing.
3 Chris Iverson, Realtor // Mar 29, 2007 at 11:54 am
Julia and Kevin both make excellent points:
I agree with Julia on the potential for down the road troubles. Stated income, Interest Only and Option ARM loans are very useful in certain situations, but are often mis-used by lenders and Realtors who are trying to push their clients into more expensive homes - sometimes beyond their means.
This doesn’t mean that all non-traditional loans are bad, or that lenders who present them as options are shady. It’s a matter of the right tool for the right job. You wouldn’t use a hammer to install a light bulb, would you?
My concern is that legislators get involved to protect us from ourselves, and draft laws with a one-size-fits-all approach. Remember that for 90% of Congress, a $1million dollar home is a mansion. So, they will draft laws reflecting the needs of Americans who should be able to scrape together the 20% down payment for a $300,000 home in the Midwest. $60,000 here covers closing costs on most places here, the first year’s mortgage payments if you are lucky . . .
I was discussing the move up market with another member of OPES earlier today. If Interest Only mortgages were to go away, or if the qualifications change, then potentially the family who could afford a $2M home now will be shopping for a $1.5M home and so on.
This could lead to bad news for Palo Alto real estate, but good news for lower priced areas like Mountain View, Sunnyvale and Redwood City, as people coming to the area for jobs are forced to look further afield as they are priced out of Palo Alto.
As I mentioned in my original post, stay tuned . . .
Thanks for reading - Chris
4 Jason Hegland // Mar 30, 2007 at 9:52 am
Being a renter myself, after first reading your article I was distraught with the concern that my time line for buying a home may be pushed back even further as tighter controls and more conservative lending practices become enacted. But then I read Kevin’s comment - “If the subprime issue does hit this market, it may be more indirect, such as condo owners in Mountain View who were intending to sell and then move up to Palo Alto not being able to do so because their buyer pool may have been largely 0% down, stated income folks.” - and thought surely there must be a way for us “plankton” to use a bit of savvy to capitalize on these shifting trends.
What are your thoughts and is there a way for us 1st time buyers to position ourselves to find a great deal?
5 Christine Kani // Apr 2, 2007 at 7:29 pm
One thing to keep in mind regarding the subprime market is that subprime by definition concerns borrowers with past credit problems. The reason that the subprime scandal has focused so much on stated loans is that in reality these borrowers (and at times their loan agents) could not make the payments. They already have trouble paying their existing bills, as evidenced by the low credit score, and their income cannot support the mortgage associated with the loan they are applying for. As a result, they have had to resort to stated income loans to represent an income that might be a gross exaggeration of their real income in order to get the loan. Such behavior is not only shortsighted, but as we all know now, ultimately has huge repercussions on all of us once they start to default in waves.
By themselves, 0% down (100% financing), stated, and interest only (even in this triple combo) doesn’t necessary mean subprime, and in fact such financing terms can still be procured from top lenders (including Wells Fargo, Countrywide, etc.) without too much difficulty, ASSUMING THAT YOU HAVE THE CREDIT. By themselves, these characteristics define what the mortgage industry calls “Alt-A”, which means, “A paper except for certain characteristics.” Having said that Alt-A has definitely been affected by the subprime turmoil. Where the subprime market has eliminated stated loan types practically entirely, Alt-A lenders have raised the credit score threshold for their loans.
For first time buyers like Jason, and for move-up families, the key in this uncertain market is to ensure that you protect your credit as fiercely as possible. Make sure you pay all your credit card (and other debt) on time — especially your mortgage. As long as you can keep your credit score above a certain limit, there are still plenty of reputable lenders where you can get a decent mortgage, and get your first (or bigger) home!
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