Ken Roberts - Real Estate Column - A New Year-a New Beginning

A R E A L E S TAT E P RO ’S P E R S P E C T I V E

A New Year, a New Beginning By Ken Roberts

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couldn’t help but be moved by the outpouring of hope generated by the results of the presidential election, both here and abroad. Mere words cannot adequately describe how monumental a shift in the power of possibility that exists now more than ever before. It has been said that a journey of a thousand miles begins with a single step. We have taken a giant stride in the direction of one world, one people. There’s no doubt a very long journey lies ahead. At times, real change arises from the aftermath of catastrophe. The possibility for great change lies before us. However, there is still much to do. With the economy in shambles, the banking and auto industries in tatters, the national real estate market in a freefall with foreclosures rising like flood waters from Katrina, and a credit crunch squeezing business and consumers alike, one might ask if there a silver lining anywhere. The answer is yes. First, the state of the South Bay real estate market is holding up far better than some areas in California. Both the San Diego and Orange County markets are experiencing a larger decline in prices than our local marketplace. But this is as disjointed a real estate market as I have ever seen in that price declines vary dramatically even within the same city. Some areas or tracts may have prices stabilizing, while in another area within the same zip code, prices are still falling. Short sales (where the bank agrees to take less than what is owed against the property) and foreclosures that come back on the market as bank-owned properties (REOs) are making appraisals challenging. In fact, new appraisal guidelines for a declining market require appraisers to use at least two comparable sales (comps) from the last 90 days instead of the usual 180 days. They require a pending sale and a current listing—or two current listings—at an equal or higher value than the comps. If the comps support the appraised value but the pending sale and current listing are lower, the appraised value gets adjusted down accordingly. Second, the Federal Reserve, as part of the stimulus plan, announced it will be buying about $500 billion of new mortgage-backed securities from Fannie Mae, Freddie Mac and “Ginnie Mae” between now and the end of June, plus an additional $100 billion of existing mortgage-backed securities. This announcement caused mortgage rates to drop and started a mini refinance boom that over the next six months could give borrowers with loan amounts under

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$417,000 the opportunity to potentially secure some of the lowest mortgage rates of our lifetime. The Fed’s commitment as a buyer of mortgages was intended to entice home buyers back into the marketplace to help shore up prices. If the real estate market is stabilized, it is the first step to boosting consumer confidence, stimulating retail spending and thus sparking an economic recovery. As of January 1, 2009, the new high balance conforming mortgage limit for loans over $417,000 has been lowered to $625,500 in Los Angeles and Orange Counties from the $729,750 limit of last year. We were hoping they would do away with the $417,000 breakpoint so that rates, lending guidelines and loan types would be the same up to $625,500. But that was optimistic. In fact, pricing above $417,000 is not only higher, but depending on the lender and day of the week, it could be anywhere from .25 to 1.0 percent steeper in rate—or as much as two points (each point is one percent of the loan amount) in fees! Pricing is very volatile and guidelines differ slightly from lender to lender. With loan amounts above $417,000, the amount of cash-out in a refinance is limited and there is an additional one-point fee charged by the lender. For regular conforming loan amounts of $417,000 or less, we now have risk-based pricing depending on credit scores. Again, pricing may vary slightly from lender to lender, but just know that a middle credit score below 740 will cost you in additional fees, with pricing increases as high as three extra points for scores below 660. Now more than ever, credit scores are incredibly important. A recent 30-day late payment on a department store card of just $10 can drop your score 80-90 points! Regular conforming cash-out refinances with middle scores below 740 also have pricing bumps. In the old days, FHA financing was difficult, expensive, slow and very finicky about the condition of the property. Escrow periods were seldom less than 60 days. There was only one interest rate to choose from, and the seller would have to agree to pay several discount points for the buyer to get that rate. If a property had any deferred maintenance, it would have to be repaired prior to the close of escrow. And then real estate values rose much faster than FHA loan limits, rendering the loan program nearly useless to even entry level buyers in most of the South Bay. Today, much of that has changed. While owner occupancy is still a requirement, FHA loan limits have increased to $417,000 for regular FHA and $625,500 for jumbo FHA. While there are several different FHA loan products today, the most popular is the 30-year fixed rate. You have the ability to buy the rate up or down by paying more or less points instead of being limited to just one rate. Guidelines for regular and jumbo FHA aren’t as dramatically different as they are with

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conventional financing. The biggest difference is that with regular FHA, with compensating factors, you can get a borrower approved with high debt ratios. Jumbo FHA will be more conservative. With the ability to purchase a home with three and one half percent down, (all of which can be a gift), add several non-occupying cosigners, (co-mortgagors) while blending all borrowers income and debts in order to qualify and allowing less than perfect credit, FHA is making a major comeback as the loan product of choice for many borrowers. FHA guidelines require the roof to have at least two years of economic life remaining, and any health and safety violations have to be corrected prior to the close of escrow. That and FHA doesn’t like peeling paint. Any interior or exterior peeling paint has to be repainted. The biggest limitation is the maximum FHA base loan amount of $625,500. As with conventional conforming loans, there are price bumps for loans over $417,000 and for declining credit scores. Mortgage insurance (MI) of a little over a half percent is required on FHA loans as well as an upfront MI premium of at least 1.75 percent if the loan amount can be financed by adding it to the loan amount, even if you are at the loan maximum. Some investors who purchase FHA loans will allow you to remove the MI Premium from your loan after a minimum of five years and if the loan is paid down to 78 percent of the original loan balance. In many instances, an FHA loan can be used to refinance when there isn’t enough equity to meet conventional guidelines. Because of the upfront MI premium

that’s added to the loan amount, your holding period for the property should be long enough to cost-justify the refinance. Once you have an FHA loan, should rates decline, you may be eligible for an FHA streamline refinance. It doesn’t require a new appraisal, so it’s possible to refinance even in the face of declining values. If you are a veteran, VA loans are still around. They also have increased loan limits to a maximum of $417,000 with no money down and no mortgage insurance. Many former vets may be surprised to learn that today they can still use those benefits to buy a home, even if they had owned a home previously using their VA entitlement. You can be currently in active military duty or honorably discharged. You don’t need to be a first-time buyer. You just have to owner-occupy the property as your primary residence. If you buy a property using your VA entitlement, you can’t buy another property with a VA loan as long as you have an existing VA loan, whether you are still currently living there or not. After it is paid off, however, through sale or refinance, you are free to use your VA entitlement again and again. As with FHA, there are many rate and point options available, making it unnecessary for the seller to have to pay any points on your behalf-- and the 30-year fixed is the most requested loan type. Also of note is that there are some limits on some closing costs charged to the veteran, and some small charges are required to be paid for by the seller for the veteran. There are some lenders still making jumbo loans at attractive rates. Jumbo loans are those with amounts

over $625,500. There are a handful of banks, insurance companies and credit unions lending out their own deposits for jumbo loans and keeping those loans in their portfolio and servicing them--meaning they collect the payments. By not bundling them up and selling them in the secondary marketplace to investors, they can choose the rate, fees, loan type and guidelines under which they will lend. For the consumer, that comes with benefits and costs. The most obvious benefit is competitive rates. We are seeing three-, five- and seven-year fixed rate ARMs, both fully amortized and with an interest-only payment option, from the low to high five percent range. These are for loan amounts, with some lenders, up to several million dollars. Thirty-year fixed jumbos are very difficult to find at a good (below seven percent) rate right now. The downside, or costs, associated with lenders still making jumbo loans at attractive rates are stringent guidelines, high credit score requirements, and very low loan-to-value ratios. In short, only the best of the best borrowers and properties make the cut. Some lending guidelines are a little crazy at times, such as not lending on a condominium project that’s less than 10 units, or 70 percent loan-to-value for single family residences but 55 percent loan-to-value for condominiums. How about not counting rental income from an investment property if the tenants are on anything shorter than a one-year lease? Then there’s always payment shock. That means if you are paying low rent in order to save up for a home purchase and your Continued on page 19

If you think you can time the bottom of either the real estate market or mortgage rates, how well did you time getting out of the stock market? It’s much better to get a good rate and a good value even if rates and prices were to dip a tad further than to miss it by waiting. 1 s t I ss u e 2 0 0 9

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A R E A L E S TAT E P RO ’S P E R S P E C T I V E Continued from page 13 mortgage payments are going to be more than 100 percent more than your current rent, no matter how high your credit scores, no matter how big your down payment is, no matter how much you have in cash reserves after the purchase, and no matter how big your income is, you will be declined because you don’t have a history of paying a big payment like a mortgage! They can draw lines anywhere they want and cherry pick all they want. At least there is good money out there available for higher loan amounts. The residential mortgage marketplace will continue to be volatile, but within a range. I am recommending those interested in refinancing get all their documentation together, get approved and wait for a favorable day when mortgage bonds put on a big rally, causing rates to dip. Have a target rate determined with your mortgage professional so they are prepared to pull the trigger and lock at the opportune time. Don’t sit around waiting for some perceived bottom only to try and scramble when it comes. If you are not prepared, ready and waiting, rates will dip and spike back up and you will miss it. If you are trying to buy in the South Bay market, know that we don’t have as many short sales and bank REOs as in some other areas. If you find one you like and it is well

priced in relation to the market, it will sell fast, in multiple offers, over full price and to the highest bidder with the largest down payment and the shortest escrow period--usually with almost no contingencies. I have seen offers submitted on both short sales and bank REOs where after two months of waiting, there hasn’t been a hint of an answer. Not an easy road… Sometimes you are better off trying to buy a home that has been on the market for a long time and has a large price reduction from extremely motivated sellers. Timing is everything. If you are buying up in price range in this market, it works well. You may be selling low, but you are buying low… and when prices rebound, your purchase will go up more in value than your sale property. If you are thinking about downsizing, sit down with your mortgage planning professional and see if makes sense to purchase now without selling. If your current residence was your primary residence the previous two years, you can rent it now and buy another primary residence. As long as you sell your previous residence within three years of converting it to a rental, it would still qualify for the capital gains tax exclusion for the sale of a primary residence of $250,000 tax-free for a single person or $500,000 tax-free for married couples. That way you could potentially sell into a higher market later for more money. While there are Continued on page 23

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that include (1) how to get access to capital, (2) Los Angeles County economic challenges and (3) how businesses can, and should, tap into the Web 2.0 world. Below is the agenda, which is subject to change: 7:45 - 8:15: Registration & Continental Breakfast 8:15 - 8:45: Mayor’s Welcome & City Presentation 8:45 - 9:45: Panel of Business Resource Experts 9:45 - 10:00: Break 10:00 - 11:30: Keynote Presentation by Steven Little, INC Magazine Business Growth Expert 11:30 - Noon: Luncheon Break Noon - 1:00: Keynote Presentation continues 1:00: Adjournment $30.00 with advance registration $40.00 at the door. Registration includes: Continental breakfast, lunch and a complimentary copy of Steven Little’s book, “The 7 Irrefutable Rules of Small Business Growth,” courtesy of Northrop Grumman. Networking Events Network Café Enjoy a great lunch and learn about Chamber members and their businesses while promoting your own. Each person will get to present a 30-second commercial in front of the whole group. Advanced reservations are required and will save you $5. Members with reservations are $20 and guests and members without a reservation are $25. Thursday, February 12, 2009, 11:30 a.m.-1 p.m. Delzano’s By the Sea 179 N. Harbor Dr., Redondo Beach Thursday, March 12, 2009, 11:30 1 s t I ss u e 2 0 0 9

a.m. – 1 p.m. First Federal Bank Meeting Room 2233 Artesia Blvd., Redondo Beach

Torrance Area Chamber of Commerce For more information about the events listed, call 310-540-5858 or visit www.TorranceChamber.com. South Bay Regional Economic Outlook Address Wednesday, February 25, 2009, 11:30 a.m.-1:30 p.m. Torrance Marriott 3635 Fashion Way, Torrance Jack Kyser, Chief Economist for the Los Angeles County Economic Development Corporation, will present the Torrance Area Chamber of Commerce Economic Outlook address to enlighten the South Bay business community on future financial patterns. Kyser is responsible for interpreting, forecasting and analyzing major industry economic trends. The Los Angeles Business Journal calls Kyser “the guru of the Los Angeles economy.” Kyser is the founder of the Kyser Center for Economic Research for the LAEDC, a not for profit organization focusing on the economic base of Los Angeles job retention and creation. His analytical research work and insightful knowledge of the regional economy help the LAEDC gain recognition as the source of economic information and projection in Southern California. Admission: $35 per person or $350 for a table for 10 people with reservation.n

Continued from page 19 no guarantees about real estate values being higher in three years, we have a much better chance of having higher prices in three years here in Southern California than in many other parts of the country. Because banks are teetering on the brink, pricing is all over the place and lenders will swiftly move in and out of the market. Banks may offer competitive rates one month, but will then raise them if they get more business than they can handle. For that reason, it makes sense to work with a mortgage planner who has as many lending sources as possible. Dealing directly with one bank can really limit your choices. We have a six-month window, at least, for great mortgage rates. No one knows how low rates will go. No one knows how low real estate prices will go. I do know there is a big inflationary cycle coming at the end of this economic disaster. With the Federal Funds Rate near zero and the Fed throwing around hundreds of billions of dollars to try and fix the mess we are in, that spells I-NF-L-A-T-I-O-N in a big way later. The Fed will have to raise short-term rates in the future like crazy to try and hold off a runaway freight train of inflationary pressure that will show up. That means a period of higher mortgage rates before things settle down again in a range. We need to position ourselves to take advantage of low rates now. When the time is right, mortgage rates will move higher in a blink compared to real estate values. If you are going to refinance, do it soon. If you are going to purchase, do it as soon as you find the right property. Waiting for the absolute bottom is not a good strategy. It begs the question, “If you think you can time the bottom of either the real estate market or mortgage rates, how well did you time getting out of the stock market?” Continued on page 30

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Continued from page 25 hard for their own interests while damning the big picture view. The governing institutions of the world’s eighth largest economy are in dire straits, but our state is not terminally ill by a long shot. In many ways, we’re doing better than other parts of the country hit harder by the subprime mortgage meltdown. California will ride through this and remember, we have been through tough times in the past. Our one weakness is that with most of the population in the southern half of the state, we low-key So Cal types often don’t

pay attention to our dysfunctional government in Sacramento. This has led bad political policy to go by unchecked for far too long. The only way for us to fix this mess is to get a grasp of the intractable issues, identify the painful compromises we are going to have to make to keep our state running as we have grown to accept it, and not let intransigence deepen the crisis any more than it already has.n

Continued from page 23 It’s much better to get a good rate and a good value even if rates and prices were to dip a tad further than to miss it by waiting. Remember, how do you know the bottom has been reached?

By looking back and saying, “Wow, there it was!”n Ken Roberts is a mortgage planner with over 30 years experience in the South Bay real estate market. Ken can be reached at (310) 792-7090.

David Whitehead is the publisher of Business Insider Magazine. He can be reached at: [email protected].

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