If you’re Eliot Spitzer, probably three feelings come to mind: panic, disorientation and regret.  But if you’re a potential home buyer in the Peninsula region of California, you have good reason to feel excited, encouraged and confident!  Why?  If you read my last post last month, you know that the conforming loan limits for many California Counties are going up and that means cheaper mortgage rates on loan amounts between $417,001 and $729,750.  Now that HUD has made it official that ALL bay Area counties qualify for the revised maximum conforming loan limit, that means potentially big savings on mortgages for qualified applicants looking to purchase single-unit properties up to $810,000 with as little as 10% down!

We’ve all heard the cliche, “the devil’s in the details”, so what are the latest requirements to obtain a conforming loans between $417,001 and $729, 750?  Since I’ll provide you with a link to Fannie Mae website and announcement , I’ll provide you with some highlights that I think are most relevant and let you read further at your leisure:

1. Single-unit properties only

2. Purchase and “limited cash out” transactions only (i.e. no greater than $2,000 going into your pocket upon settlement)

3. If primary residence purchase, up to 90% loan-to-value (”LTV”) allowed if fixed-rate program is selected–700 minimum FICO(R) required; 80% LTV if an adjustable-rate loan is selected–660 minimum FICO(R) required; if refinance

4. If second home or investment property purchase, maximum 60% LTV allowed with minimum 660 FICO(R) regardless of eligible loan program selected

5. If refinance, regardless of type of eligible mortgage program, up to 75% LTV allowed, plus subordinate financing allowed in addition up to 20% LTV–660 minimum FICO(R) required

     a. SPECIAL NOTE, consolidating existing first mortgage and subordinate mortgage into one loan NOT eligible AND six  months of “seasoning” (six payments made on existing mortgage) required to refinance!

6. Loans are eligible for origination NOW 

7. Eligible programs include 30-year fixed, 15-year fixed, LIBOR-based 5/1 ARM (amortized and interest-only payments allowed for this program)– more programs may become available

8. Sufficient employment, income and assets must be verified and each file will require manual underwriting– automated underwriting engines not allowed at this time

Again, I do encourage you to read the Fannie Mae announcement from the 6th of March for all the details, but the above are the top highlights.

So what will pricing look like on these “new” conforming mortgages?  Well, pricing has just recently been released by only a few institutions, but it looks like the 30-year fixed is running at about 6.375% and the 15-year fixed is running at about 6.25%.  The 5/1 ARM pricing is expected to be released next month.  What I do think is that pricing may actually get a little better in the short term as more institutions post pricing and auctions are successful with Fannie Mae and Freddie Mac. 

What’s right for you as a would be home buyer on the Peninsula?  That depends of course on your specific situation, and I do encourage you to consult with your trusted mortgage and financial consultant before placing an offer on a home or refinancing your mortgage.  What I can say is that the majority of our clients who are buying or refinancing today are selecting a jumbo 5-year ARM in the mid-5% range due to its balance of savings, security and flexibility.

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. . . Said my friend Amy to me the other day. Since she is sort of a typical first time buyer, (actually not), I decided to make an example of her and contribute to her 15 mins of fame.

Amy is your somewhat typical Sillycon Valley MBA tech-marketing type. She works in marketing for a large company, so her income is derived from her salary, as opposed to commissions or stock options that may or may not vest. The company is stable, so her bonuses tend to be consistent and her income fairly predictable. She recently moved from one giant tech company to a large one, so she has a number of years of experience in her industry and job classification, excellent credit, and some equity from a condo that she sold.

Being an MBA, and financially conservative (politically liberal), she can comfortably afford something in the $650K price range, even in the current lending environment. The previous idea was for her to take out two mortgages, a conforming loan of $417,000, and then a second or equity line to cover the rest.

Now that Mr. W. has signed off on the stimulus package that included a short-term increase in the conforming loan limit for 2008, Amy’s interest in buying a house has gone up. The tax rebate will let her buy her kids a happy meal and some new jeans, so her interest is much more in the mortgage changes.

At the time of our conversation, the difference in rates between a conforming (under $417,000) and jumbo ($417,001+) loan was about .75%, depending on a million things, which I will leave to co-contributor Eric Trailer to explain. Jsut plugging in some numbers, on a loan of $585,000 (10% down on our $650K house), her payments would drop about $4300 a year excluding taxes if that loan was at the lower rate. Now we are talking interesting.

Admittedly, this is very simplified, because it doesn’t take into account the cost of a conforming first and then a second, or whether lenders will have tiered pricing based on the loan amount, or credit scores, documented vs. non-documented income, etc., etc., etc.

My intent is to show the effect of this new law on “normal” Silicon Valley home buyers who have “normal” jobs, and are trying to put a roof over their heads. While the tax rebates of a few hundred dollars will only have minor impacts on most of us (I get $300, I think), the effect on home buying capability will be potentially significant.

Let the comments fly, and thanks for reading.

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The Superbowl traditionally marks the beginning of the Spring real estate market here in Silicon Valley. True to form, we are seeing inventories climb from seasonal lows, and a lot more people visiting open houses on the weekends. As the media continues to run stories on increasing foreclosures, and an economic stimulus package that includes an increase in the limits for conforming loans wends its way through Congress, more and more people are asking me if this is a good time to buy a home.

 In our area (Palo Alto, Los Altos, Los Altos Hills, Menlo Park, Mountain View), prices have been stable in 2007 (except Palo Alto which is up significantly), and we aren’t seeing the big jumps in foreclosure activity that are widely reported in the media in other areas. As the Federal Reserve has cut interest rates to stave off a national recession, loans have become more affordable nationwide, with rates near historic lows.

The majority of short sales and foreclosures in the area have been in homes in the $600,000 price range, having the effect of making many of these homes more affordable as lenders want to get rid of them. In contrast to most economic downturns, the higher - end market is doing better than the lower end.

Fellow contributor and mortgage banker Eric Trailer at Absolute Mortgage Bank in Palo Alto had these thoughts on the local housing market for the next few months:

“The coil on the Spring market is winding tighter every day this year already.  Applications are up 100+% this month over December and January’s production is more than double December’s.  In addition, we continue to be flooded with refinance inquiries this month.  Many of the buyers that we had on the fence have been jumping off in an attempt to get into contract on a home prior to February 9.  Why Feb 9?  That’s the weekend following The Superbowl, and those fence-jumpers feel as though they can avoid the threat of multiple offers by securing their home now.  With many of the top agents that we do business with stating that they have multiple listings coming on the market the week of February 9, combined with the flurry of activity on the buyer’s side, combined further with the strength of our local economy, it’s looks like this Spring will produce transactions well beyond expectation.”

Well Eric, it’s February 10th, my open house for today sold without contingencies 3 days after going on the market, and the number of new listings in Palo Alto this week was double that of any week for about 3 months. It looks like we are off to a good start to 2008, and the local economic indicators are still favorable.

Homes are not liquid investments like stocks, so make sure you actually like the house you are buying, and plan to be there for 5 years or more. With those caveats, in this area, it’s almost always a good time to buy a home.

Thanks for reading.

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I have long been a proponent of Bay Area real estate, and especially that rare piece of level ground on the Peninsula where the laws of Supply and Demand exert the greatest influence.

Amid tales of worldwide stock market tumbles (US markets were closed today in observance of Dr. King’s birthday), this little tidbit of sanity was embedded in an article in today’s online San Jose Mercury News:

Stock slides: Stocks sank around the world today, as U.S. markets remained closed for the Martin Luther King Jr. holiday.

The most dramatic decline was in India. The bellwether Bombay Sensitive Index plunged 1408.35 points, or 7.4 percent - its largest ever single-day drop in points. The pan-European Dow Jones Stoxx 600 index continued its six week slide, falling 5.7 percent to 308.77 percent.

Yet among the spreading gloom, Silicon Valley is shining.

“Silicon Valley is in better shape than the overall U.S. economy,” said John B. Sloven, director of the Stanford Institute for Economic Policy Research. “My overall assessment is the Silicon Valley economy is going to come through this pretty well unscathed.”

Some facts to consider: Prices in Silicon Valley’s wealthiest areas are holding up. Meanwhile, prices are dropping on low-end homes, increasing affordability. The region added jobs in December for the third consecutive month. Finally, the San Jose region is supposed to lead the state in personal income growth over the next few years.

(Read the full article here)

The interesting point is that the falling prices for lower end housing makes things more affordable for first-time homes buyers. My personal experience is currently supporting this, as I have a couple of clients shopping for their first homes in the $600,000 - $650,000 range, and are seeing personal benefit as homes that were recently listed tantilizingly close to their range, but just out of reach, at $700,000, are now being reduced to under $650,000.

The amazing thing about this area is that the economy continues to reinvent itself, the economic engine continues to churn through economic expansion and recession, and housing remains a scarce commodity because we have very little land to build new housing on.

Not to sound self-serving, but it is a great time to buy real estate here in Silicon Valley, especially if you can scrounge together a 20% down payment and have a history of actually paying your bills. Prices in some areas are down, flat in others, and interest rates continue to be near historic lows.

Donald Trump recently announced that he is seeking investors for a fund that will invest $100 million in California real estate in the next couple of years.

If California real estate is good enough for The Donald, isn’t it good enough for the rest of us?

Thanks for reading.

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Ben And The Boys (aka the FOMC) cut short-term interests rates by .25% earlier today in an attempt to:

1) Soften the mortgage industry landing from a smoking hole in the ground, to more of a smoldering skid mark. Don’t tell Washington Mutual who announced 3000 employees were getting pink slips in their stockings, and the bank is setting aside up to $1.6 Billion for losses in the 4th quarter.

2) Generate some consumer confidence this Holiday Shopping Season, since 2/3 of our economy is driven by consumer spending. Uncle Sam wants you to buy a Ford and / or Chevy.

3) Address concerns that “information suggests that economic growth is slowing,”

4) Give me somethnig to rant about (Thanks, guys!)

Interestingly, Wall Street, which has been on the rise over the last two weeks, had apparently priced in a bigger cut, so it responded by pummeling the Dow, lwhich lost 294 points on the day. Ouch! Maybe some retail therapy is in order . . .

Mortgage rates weren’t significantly affected by the rate cut. The Fed Funds rate is a short-term rate, and mortgage rates are long term. Mortgage rates are still at two-year lows, and it’s a Neutral or Buyer’s Market everywhere but Palo Alto.

Apparently, Palo Altans stayed awake in Econ 101 during the lecture on how relative Supply and Demand affects Prices. Although Demand in Palo Alto has dropped in recent months, Supply has dropped equally or more, maintaining or increasing Prices. Adam Smith would be proud.

Bueller, Bueller . . .

For an actual news article on today’s rate cut by an actual journalist, as opposed to a caffeineated Realtor, click here.

 Thanks for reading.

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My favorite online news source, The New York Times, ran a story today “Dubious Fees Hit Borrowers in Foreclosures” in which the writers interviewed Katherine M. Porter, associate professor of law at the University of Iowa. In a review of many loans that are now going into foreclosure, Porter found that questionable practices among lenders are leading some experts to contend that lenders are taking advantage of higher-risk borrowers and those facing foreclosure.

“Because there is little oversight of foreclosure practices and the fees that are charged, bankruptcy specialists fear that some consumers may be losing their homes unnecessarily or that mortgage servicers, who collect loan payments, are profiting from foreclosures.

Bankruptcy specialists say lenders and loan servicers often do not comply with even the most basic legal requirements, like correctly computing the amount a borrower owes on a foreclosed loan or providing proof of holding the mortgage note in question.

“Regulators need to look beyond their current, myopic focus on loan origination and consider how servicers’ calculation and collection practices leave families vulnerable to foreclosure,” said Katherine M. Porter, associate professor of law at the University of Iowa.”

You may be asking what this means to you in Palo Alto, happily making your payments on your $1+ million mortgage on your $2.4 million median priced home (no, that isn’t a typo!). As Mortgage Manics have heard me say before (OK, read), national lenders use a mostly one-size-fits-all approach to lending, meaning that practices and guidelines that are developed and applied to home buyers in Iowa, Tennessee and Colorado are also applied to us here in Silicon Valley. As a result, if you are reading about unscrupulous practices and excessive fees by national lenders that are being exposed in areas with high foreclosure rates, you may want to check the fine print on your mortgage and see what you are paying for in addtion to PITI.

In addtion, Porter found that lenders didn’t provide accurate payoff amounts for their loans to consumers, with one claiming they were owed $1,000,000 when the actual payoff amount was $60,000. That must be that fuzzy math stuff . . .

Countrywide was recently sanctioned by a court in Pittsburgh for losing or destroying over $500,000 in checks between December 2005 and April 2007 for homes in foreclosure. These are the companies holding the title to our homes, so we need to keep an eye on them.

You can read the full text of the article here.

On that happy note, have a great week, and thanks for reading.

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You longtime readers (since March 29th) will remember my original Mortgage Mania article “Subprime Loans - Should Palo Altans Care?” that discussed some potential ripple effects of the subprime lending boom and bust, and the resulting changes in lending requirements for purchasers of million-dollar plus homes in Palo Alto and surrounding communities.

In that article I mentioned that tougher lending standards were on the horizon. Since major lenders do loans all across the country, they take a one-size-fits-all approach to guidelines, and in attempting to shelter themselves from risk associated with rising loan defaults in free-fall markets like Detroit (or Antioch, Gilroy, etc.), for example, they are making changes to lending guidelines that will make it harder for high-income folks with strong credit to buy homes here.

For some in-depth knowledge on this issue, the changing guidelines, and what you can do now if you are in the market for a home, I turn to Curt Van Emon of OPES Advisors, a wealth management firm with offices in Palo Alto, San Mateo and now Los Gatos. OPES is latin for wealth, and my go to source for analysis of what changing lending rules mean to my clients.

Curt is a fellow blogger, so you can read all of his analysis here at financeambition.com. I’ll just give you the summary here.

- As I mentioned back in March, guidelines are changing, and so buyers wanting to use interest-only loans for purchases will need to qualify based on their ability to make payments including principal AND interest.

- It will become harder to qualify for an adjustable rate mortgage than a fixed rate mortgage

- Buyers will qualify for lower loan amounts, meaning less buying power. (Goodbye 4-bedroom house, hello 3 bedroom)

When do the new guidelines take effect? July 22. So, read Curt’s recommendations, mark your calendar and contact your Realtor if you are planning on buying a home anytime soon.

If you aren’t currently working with a Realtor who is financially savvy and can explain what these changes mean to you, I know where to find some.

Stay tuned for updates on if and how these new guidelines affect buyers and the local real estate market in and around Palo Alto.

Thanks for reading . . .

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I wanted to have a compelling title for a little experiment I recently did with my listing at 206 Palmita Place in Downtown Mountain View. It’s a newer construction home and I thought the location and price would appeal to couples or small families. Based on that demographic, I assumed more people would be searching for homes online, so I built a custom website for the house, and posted links to it on a number of real estate websites in addition to the ones like mlslistings.com that link to data on the MLS.

I also followed conventional wisdom and ran ads in the Palo Alto Weekly and Mountain View Voice newspapers, and an entry in the Open Homes Section of the San Jose Mercury News.

I then did some informal polling at the various open houses, asking visitors where they found out about the open house, leaving it as an open ended question. I also tracked hits to the website and looked at who the referring domains were. I found the results interesting and surprising.

Where did they come from?

Over the course of 4 days of open houses (Thurs and Fri evenings, Sat and Sun afternoons) we had 135 groups of visitors through. Of these, only 2 said they came based on the ad in the MV Voice, 1 from the Palo Alto Weekly and 1 from the SJ Merc. Another 11 groups had seen the open house directional signs (I blanketed the neighborhood) or the For Sale sign in the yard as they were passing by. That’s 14 out of 135 groups, or about 11%. The other 89% of visitors either found the listing online or were referred by their agents.

Online sources

I also tracked where hits to the website came from. There were over 2200 hits to the website, and initially 70% of those came from Movoto which is an online real estate information / referral site. After the first two days, mlslistings.com caught up, and after the first week was the source of about 70% of the hits. The house went under contract after a week, so I stopped tracking then.

While I admit that I am biased, I have had a theory for a while that newspaper ads for listings, especially in Palo Alto and surrounding communities, are more for advertising the agent and getting him or her more clients than getting potential Buyers into your home.

The National Association of Realtors estimates that 74% of home buyers begin their search for a home online, and the estimate for Silicon Valley is 92%. I’m still running an ad for my new listing in Redwood City, but it is only 1/4 page and that is because the sellers believe that potential buyers read the paper. I am also flooding the internet with placements and links, and I’m trying an experiment by posting the home on Zillow as well. It’s another experiment, and I’m partially doing it to get under Kevin’s skin as Zillow is a hot-button for him.

I’m tracking the marketing response on the Redwood City house as well, and I’ll do a post on the results from that when it goes under contract. In the meantime, I welcome your comments and hope for a bit of banter on online vs. print marketing.

Thanks for reading.

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Hi again,

I received another update on changing guidance in mortgage lending from Rachel Van Emon at Opes Advisors. While she consistently seems to be the bearer of bad news lately, she is actually a delightful person! So . . . don’t shoot the messenger.

A key point she brings out in her latest article is mortgage guidelines can change withour notice. This means that if you haven’t locked a mortgage and rate on a particular property, you can find that funding scenario disappearing in the wind.

A prominent national lender recently changed their guidelines to include the following:

·         To qualify for an Interest Only Jumbo loan (over $417,000), a fully amortized payment must be used.  This means borrowers must make more income to qualify for the same loan amount and program.
·         On loans where over 40% of the combined annual income of both borrowers is from verifiable sources (salary, W2, etc.), Stated Income will not be allowed.
·         For No-Income verifier loans, first time buyers are not allowed and payment shock is limited to 12% of current housing payment.
In an area where a number of first - time buyers are purchasing with 10% or less down payments, and many others are self employed, consultants, or contractors, these new guidelines can have a ripple effect on even the market in Silicon Valley where, unlike most of the country, we are enjoying rising property values and strong housing demand.

Unfortunately, most major lenders provide loans nationally, and so need to take a “one size fits all” approach.

Click here to link to the full article.

Thanks for reading.

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Last week I mentioned an article written by friend and colleague, Rachel Van Emon at OPES Advisors on the ripple effects of the sub-prime lending crisis and impending changes in lending guidelines.

Things move quickly in this market and industry, so I wanted to draw your attention to a recent article in the San Jose Mercury News saying that the impact will be minimal in the local market, except for some first - time buyers. The sky isn’t falling.

However, the article goes on to note that lenders have changed their guidelines, and that highly leveraged loans that are the bread and butter of first-time homebuyers are going away.

Quote: “He cited a recent young client with a credit score of just over 660 but a relatively short credit history, who is looking to buy her first condominium using 100 percent financing.

“With the guidelines changing, now some of the lenders who would have taken that three weeks ago … can’t do it today,” he said.”

Assuming this young buyer has good cash flow and a salary-based job, she should be a pretty good credit risk for a mortgage. That is how I bought my first home. Local prices are sky-high already, and this could be another barrier to entry for many.

It’s not only first-time buyers who are short on savings and didn’t pick their parents well who are affected. Bay Area buyers are financially sophisticated, and have used interest-only and other non-traditional loans to allow them to divert cash that would be spent on traditional mortgages into higher return investments. Reducing their ability to do that could dampen some of the enthusiam that is contributing to the currently hot market.

Thank for reading, and I welcome your comments.

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