Question of the week: Are we experiencing another housing bubble?
Answer: This week’s question comes not from clients or industry professionals, but from myself and it is one I have asked several people over the past week. My question has been prompted by some data recently released on housing prices in Southern California.
Last week Marilyn Kalfus of the Orange County Register asked me for feedback on an article she was writing about the decline in housing affordability in Orange County (article here). Marilyn cites data that shows that only one in three Orange County families can afford to purchase the median priced home in the county.
This past week the LA Times also had an article on housing price data, showing the median price in Southern California continues to rise and is at the same level it was in June 2008 (LA Times article here). June 2008 was approximately two years past the peak of housing prices in the summer of 2006, and June 2008 prices were comparable to June 2003—three years before the peak. The last time the state-wide affordability index was at the current level (44% of families can afford the median priced home in California—based on the income required to purchase the median priced home with 20% down at current interest rates) was in June 2008.
Like the inflation of the housing bubble that peaked in 2006 and really popped in the summer of 2007 we are seeing a very strong run up in housing prices under some unusual circumstances. Is the current sharp increase in housing prices creating another real estate price bubble that will be unsustainable and result in another significant drop in values in the future? Or are the circumstances causing the price increases strong such that while the continued rate of increase cannot be sustained but the prices reached can be?
Let’s look at some of the circumstances that led to the bubble creation in the 2000’s:
· Very loose mortgage underwriting criteria
· Highly leveraged financing available (read 100% financing)
· Historically high employment/unemployment rate consistently below 5%
· Relatively low rates vis-à-vis employment and economic growth
· Lack of uncertainty in economy and consumer confidence
· Low investor participation in residential market
Now a look at our current economic conditions and circumstances:
· Tighter mortgage underwriting criteria
· Greatly reduced number of highly leveraged purchases (capped at 96.5% by FHA)
· High unemployment and very high under-employment
· Historically low mortgage rates
· High uncertainty in economy and consumer confidence
· Extremely high investor participation in residential market
Looking at today’s factors they are almost the opposite of the circumstances that existed in the 2000’s that led to the creation of the housing price bubble, so why the increase in prices and is the rapidity of the increase creating a bubble that can pop?
In discussing this with one of my partners, Michael Cleveland, he brought us some very good points that the current run up is not creating a bubble. Primarily is the leverage argument. The property being bought in the current market has significantly more equity at closing (i.e. down payment) than in the prior bubble market. Much of the price run up in the entry level markets has been the result of investors with all cash offers bidding against families trying to purchase a home with standard financing and down payments. Should prices drop in the future the current crop of new home owners are much less likely to walk away from their homes than their predecessors because they have significant investments in their homes. If you have $75,000 invested in your $500,000 and the value drops to say $450,000 you are much less likely to walk away than if you have no money invested in that same home.
Investors are a major factor in the rapid value increase. Seeing very good returns on investment with the rent revenue covering any financing, maintenance and tax costs, investors have participated in the residential market at historic levels. As prices increase the investors are beginning to leave the market and now most of the bidding wars on listed properties are between families trying to purchase their new home before they are priced out of the market (sound familiar?). When the investors have left the single family residence markets will the multiple offers and over-bids continue or will the market settle down?
Inventory was a primary cause in the collapse of the housing market starting in 2007 and is the primary cause of the price increase in the current market. Economics 101, the greater the supply and lower the demand the lower the price, the greater the demand and lower the supply the higher the price. In the past year we have seen the amount of inventory on the residential market shrink considerably as the bank-owned and controlled sales (short sales) have been pretty much cleared out of the market. There are still REO’s on the market but at a much lower percentage and the future of the REO market is every smaller as we see from the decline in delinquency and foreclose filings. Short of another wave of foreclosures, what would cause the supply and demand for housing to equilibrate and lessen the rise in home values without collapsing the values?
Rapidly rising unemployment was a serious economic issue for several years, while continuing high unemployment continues to be a serious economic issue. Many families that lost their homes to foreclosure did so because of lack of income, or serious reduction in income, making it impossible for them to make their housing payments. Seeing a home that is worth 80% or less than what they owed on the property, having little initial investment in the property many families walked away from their homes rather than start taking funds from savings or retirement accounts to make their payments. Those purchasing homes today feel they are beyond any future lay-offs and their job security reduces the chance of their becoming a possible future foreclosure. As full-time employment rises more families will be eligible to purchase new homes putting pressure on the housing market as more families can afford homes—but as prices increase with the new incomes be able to support the necessary mortgage payments to qualify for their new home?
Looking forward there will be some negative pressure on the personal income and employment as many small employers are faced with the higher costs they may experience when the American Affordable Care Act (i.e. ObamaCare) is the law of the land in 2014. Employers with more than fifty full time employees will have to either provide medical insurance or pay fines. We have already seen reports that many companies across the country are cutting the hours of part-time and full-time employees so as to full under the fifty full time employee criteria. Will this reduction in income have a significant impact on the economy to the extent that it creeps into the housing markets? Personal consumption is approximately 65-70% of our GDP, if a significant number of workers are having their hours and income greatly reduced it stands to reason they will spend less money beyond rent, food and clothing, what is the impact on the economy at large?
From my perspective the biggest factor in whether we are seeing a housing bubble that will see a burst, or air letting be let out quickly, in the future is the Federal Reserve. Since 2008 the Fed has been following a policy of Quantitative Easing. Essentially putting almost three trillion dollars into the economy—much of it by purchasing Mortgage Backed Securities. Currently the Fed is purchasing $86 billion per month of mortgages, the result is extremely low interest rates. What happens to the mortgage rates, and interest rates in general, when the Fed quits buying most of the mortgages being funded every month? Basic economics, supply and demand, tells us that rates will rise. When the rates rise against already higher home prices then affordability really drops for the average family. How much will this slow demand for housing? Unless personal incomes increase as, or before, interest rates climb there will be strong pressure on home values to decline, unless they can retain their values at the time rates are rising.
One other possible consequence of the higher rates that should result when the Fed quits its buying spree and begins to increase its rates is the rising rates those homeowners who are still in adjustable rate mortgages will experience. There are many homeowners who purchased, or refinanced, homes prior to the bubble burst with adjustable rate mortgages. While they have benefited tremendously from the extremely low rates of the past several years, unless they have been making strong payments to principal during this period of low rates they are facing a future of higher payments---can they afford them? So far the refinance programs that have been made available to mortgagees with conventional and FHA mortgages that have no loan to value requirements have not been made available to those who purchased homes using non-conventional financing. This is where the “shadow foreclosure” inventory potentially exists.
Are we seeing the beginning of another real estate price bubble? There are strong arguments for yes and no answers. Overall I have to agree with my partner, prices should not continue rising as the same pace as the past twelve months and we will see a gradual slow down but should not see a rapid decline in prices—should current economic conditions continue.
As employment slowly grows, as investors leave the market, as prices climb a bit further pricing more families out of the market, and because of the growing equity for existing homeowners and the equity brought to closing for new homeowners we will see a slow-down in value increases but not a reversal.
Have a question? Ask me!
In college I majored in Economics and Political Studies. It was an interesting study as there are those who feel that everything is economic and those who feel everything is political. Socialist and communist political systems the two are intertwined with the political dictating the economic, in our republic one impacts the other and at times dictates to it. This week we have seen mortgage rates impacted less by economic news than by political news. Despite economic reports that should have a positive impact on rates we have seen politics causing a run up in the stock markets and a resulting drop in Mortgage Backed Securities (higher rates).
Investors have run to stocks and left bonds (mortgages) as it appears more and more likely that Washington will be consumed for the next several months, possibly years, with gridlock as hearings are held on the IRS audit issues, Benghazi and the Justice Department investigating the AP. Business loves a government vacuum, it means fewer regulations, reduction of new taxes and the certainty that it can operate under current conditions until the gridlock is broken. While we are still eighteen months away from mid-term elections for Congress it appears there will be little that the Administration or Congress will get done until and unless the current events capturing the news are fully investigated and resolved. And that no new ones appear to capture the attention of all involved.
So when news such as higher unemployment filings, decline in manufacturing output numbers, negative inflation numbers for consumers and wholesalers (prices dropped in April), Europe’s recession continues and France announced it has entered double-dip recession, we would expect lower interest rates, or at least rates moving sideways. The news that would push rates up would be higher than anticipated consumer confidence and rumors the Fed will end its Quantitative Easing by the end of the year. But none of this news has had the impact of the political spectacle in Washington that has pushed stocks and bonds in opposite directions.
Rates for Friday May 17, 2013: Rates continue to climb as bond buyer worry about the Fed ending their purchasing policy and stocks climb. Conforming hits highest level in two months. Will rates continue to increase or will we see bargain buyers enter the market in the near future pushing rates back down? Much of it depends on the strength of the belief that the Fed will soon quit feeding the equity and bond markets.
FIXED RATE MORTGAGES AT COST OF 1.25 POINTS
30 year conforming 3.5% Up 0.125%
30 year high-balance conforming 3.625% Flat
30 year FHA 3.25% Up 0.25%
30 year FHA high-balance 3.5% Up 0.25%
Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, no impound account and period rate is locked. Rates are based on 20% down (3.5% for FHA) with 740 FICO score for purchase mortgages.
Having studied economics and politics for many years my common reaction to most political issues is, “how would you frame this if it had occurred with the other party?” We all have personal biases, and ideologies and political favorites whether we admit them publically or not. When looking at an issue think about how you would feel and react if you were a supporter of the side you typically oppose. That is how you get a “fair” look at an issue and an understanding of why one side or the other is hot about it. This works regardless of what party is in the White House, controls Congress or what the issue is---if more people took this approach I feel there would be less confrontation and more agreements. Look at both sides of an issue from both viewpoints, clarity often follows if this is done with as much lack of personal bias as you can bring to bear.
We are attending our first baseball game of the season with our co-workers at Stratis Financial, looks like a great night for a some hot dogs, beers (or sodas) and peanuts…might be a bit greater if the Angels were performing to the level their roster suggests they should.
Have a great week,
Dennis
Question of the week: Can rates go lower?
Answer: Yes.
Will they?
Maybe.
Since mid-March Mortgage Backed Securities (MBS), the financial instruments that determine interest rates, have risen steadily in price. With bonds, which MBS are, higher prices mean lower yields—or interest rates. So as MBS prices rise then rates and the cost to borrow money drops. Currently the MBS prices are below the highs seen at the end of 2012 and mortgage rates are slightly above their lows from the same period.
The question asked this week, by more than one client, is will rates be lower in the future than they are today. The “maybe” answer is the most accurate anyone can honestly provide, but a look at what causes mortgage rates to rise or fall can perhaps put a positive or negative slant to our maybe.
Regular readers of the Weekly Rate & Market Update know that the economic news for the past several weeks (months? Years?) has not been that terrific. Investors react to economic data with their buying and selling decisions based on what that data indicates, to them, the future economy will look like. When economic news is poor, or not positive, then bond investors react by buying bonds and driving up prices (and rates down) with the supposition that those who control the money supply (federal government and Federal Reserve) will drive interest rates down to encourage economic growth.
Contrarily, when economic news is good then investors react by selling bonds, driving prices down and rates up, anticipating higher interest rates in the future as those who control the money supply try to slow growth to avoid inflation that could hurt the economy.
Our most recent spike in rates from the January 2013 to February and early March came as a result of economic news that investors took to be positive. Reading through the Weekly Rate & Market Updates from that period you will see that there was not any data that provided the optimism but mostly political news and wanting to be positive. The “fiscal cliff” was avoided by the politicians and that caused a euphoric reaction by investors. There was a glimmer of positive labor news with some lower unemployment claims being filed. Globally it seemed that perhaps Europe was coming around and seeing some growth. Domestically prices were flat but not negative.
As February turned to March and more solid data presented itself showing that the economy was not really doing much of anything, a dangerous state for an economy as it can easily fall back into recession, investors began to recall their fundamentals. Primarily that the Federal Reserve would continue to offer free money to those it lends to, financial institutions, and pump $85 billion per month into the economy by purchasing federal debt from the Treasury and mortgages from Fannie Mae and Freddie Mac.
Add to the Fed’s weekly cash injection continued government deficit spending of almost $100 billion per month and investors see an abundance of cash with little happening in the economy to soak it up. In essence the flow of money dictates lower rates for some time to come and investors did not want to be sitting on the sidelines as bond prices rise knowing those prices would go up.
Absent any positive news rates should continue to float sideways, or float down to the previous lows seen in late 2012. There has been plenty of positive news in the housing markets but this news has been shrugged off by investors as they have focused more on employment, Gross Domestic Product growth, manufacturing output and production and wholesale and consumer prices.
Will rates go down? Maybe…with a strong probably unless we see some consistently positive economic data and not just political agreements that push off dealing with the national debt and continued deficit spending. For the short term there will be some work to be done for rates to recover from today’s employment reports, see below.
Plenty of economic news this week to discount my comments above. Early in the week inflation numbers were released, and there is none. Personal income and spending declined in March—remember consumer spending is approximately 65-70% of our economy. Also released early in the week were existing home sales beating expectations and the Case-Schiller home price index showing continued growth in home prices across the country. The housing market news was ignored or negated by the income and price data and trumped even further by poor reports on manufacturing and production growth.
Employment reports released Wednesday (ADP’s private payroll survey) and Thursday (Labor Department’s initial employment claims) should have cancelled each other out for market impact but the Thursday report had no impact. ADP reported their survey showed only 119,000 private industry jobs added nationwide in April, much lower than expectations and significantly lower than what would be considered healthy growth in employment. The initial unemployment claims led to headlines “lowest in five years!” but the number is still over 300,000 individuals filing for unemployment insurance.
With high prices on mortgages, and investors looking for a reason for some profit taking the markets were poised to react to today’s release of April’s employment numbers. Perhaps the first firm employment data in quite some time, the Labor Department announced that 165,000 jobs were added to the economy in April. That number alone would not move markets, however the employment announcement also included very significant adjustments to the February and March numbers adding 144,000 jobs to the economy. The unemployment rate dropped to 7.5% from 7.6%, and unlike previous drops this was not due to workers leaving the labor force. In fact for the first time in a long time more workers entered the labor force than left. Overall a positive employment report, one that was expected several years ago following the end of the last recession in June 2009.
Investors took advantage of the report to sell off on bonds, and MBS, to take profits causing a spike in rates today. Will the spike and trend continue? That is the key question for the future of mortgage rates. Today’s activity was based on one report that is counter to several other reports in recent weeks, as well as today. Along with the headline numbers of employment being reported the deeper and broader employment numbers showed that the number of Americans seeking work, or more work as they are working part-time and desire full-time work, increased, that the labor participation rate remains near 63% and 30 year lows, and that factory orders declined in March.
Rates for Friday May 3, 2013: With today’s movements conforming rate is barely hanging onto last Friday’s number, and high-balance has lost a little ground. The next few days may be a bit choppy as investors sort through the data and the direction the market will take. I suspect a lot of the choppiness is from profit taking and timing to get back into bonds and mortgages.
30 year conforming 3.25% FLAT
30 year high-balance conforming 3.5% Up 0.125%
30 year FHA 2.875% Down 0.125%
30 year FHA high-balance 3.00% Flat
Summer preview this week as SoCal temperatures climb near triple digits—it appears Spring will be right back however after the weekend. When we were on the East Coast in early April in thirty and forty degree temperatures with blustery winds my daughters kept saying, “why is it so cold? It’s Spring!” I needed to remind them that for much of the country “Spring” did not mean the temperature going from 68 degrees to 76 degrees. As well I got to trot my, “back when I was your age…and living outside of Philadelphia I played a Little League game one year on May 1st and it was snowing.” (Naturally I also walked to school in the snow up and down hills both ways…..)
Enjoy the Southern California Spring/Summer weekend!
Question of the week: How long should I keep all the paperwork from my loan(s)?
Answer: This question was asked by brother in-law Dave last week as he was cleaning up from his tax preparations. They have had a few refinances over the years, like many homeowners, and he wanted to know how long he needed to retain all the closing paperwork, disclosures, etc.
The first part of my answer was, “Verify with your CPA or tax-preparer…” which is always sound advice.
The statute of limitations for the IRS auditing your taxes is three years (they may extend that period if they suspect fraud on your part in previous filings) and four years for the California State Franchise Tax Board to audit you on past filings. So if you deducted any part of your loan transactions, either for purchase or refinance, you will want to retain those records showing the source of the deductions for at least four years.
If you did not claim any deductions from a refinance, which is most typical as most refinances are with no points, your decision to keep or shred your closed loan documents is up to you and what makes you feel comfortable. I would advise however keeping copies of your Note for as long as you have your mortgage in place. We have seen many examples of the past several years of contentious proceedings for defaults and foreclosures and if there is any dispute between you and your lender the Note will be the most important document for you to provide to an attorney.
If you have a Home Equity Line of Credit you should retain all those documents until the credit line is closed regardless of whether you deducted any charges on your taxes or not. The HELOC is like a credit card and has variable rate terms, as long as you have the line open you should retain the Note and other documents.
My advice is to keep all your loan documents from your closing in one place and retain those items until that loan is paid off. I would not rely on being able to copies of your closing papers and note from your lender in the future as the servicing rights on your mortgage may be transferred in the future and make it more difficult to obtain those items should you need them in the future.
One final note, like all legal and financial documents if you are discarding do not throw in the trash but shred the documents. Every home should have a small shredder for disposing statements, documents and other items that have your personal information that could be used to establish a false identity or enable credit fraud.
Quiet week for economic data with the focus being on today’s release of 1st quarter Gross Domestic Product data. Following the last GDP report showing only 0.4% growth in the 4th quarter of 2012 expectations were for a rebound in growth up to 3%. The actual number was a disappointing 2.5%, which helped rates continue their positive momentum (positive meaning rates getting cheaper). With a significant drop in durable goods orders reported earlier in the week mortgage applicants are continuing to benefit from no positive economic news.
Rates for Friday April 26, 2013: Conforming high-balance and FHA rates drop from last Friday. Conforming rates move sideways as lenders retain some of the gains in the Mortgage Backed Securities markets. We seem to have hit some resistance at 3.25% for conforming rates, if economic news continues as it has we should see a break through that level.
30 year high-balance conforming 3.375% Down 0.125%
30 year FHA 3.00% Down 0.25%
30 year FHA high-balance 3.00% Down 0.25%
For readers in the Bixby Knolls area if you know anyone who has lost a Husky let me know. The dog was running around our street yesterday afternoon with a collar but no tag, a very sweet dog who needs its family back.
Question of the week: Should I get an FHA or conventional loan?
Answer: This question has been more frequent with the increase in new home buyers, though it is often not a question but a statement, “I want a ___________ loan” filling in the blank with conventional or FHA. New homeowners should not enter the loan pre-qualification process and pre-approval process with too many preconceptions on what type of loan they will get. Go through the full qualification process and then we can determine what is the best mortgage options for you to fulfill our desire to be a home owner.
Many people have many misconceptions regarding FHA financing to purchase a home that there are several hurdles and restrictions to surpass. FHA guidelines do have some property requirements that are more detailed than those on conventional mortgages, but otherwise FHA has fewer limitations than Fannie Mae and Freddie Mac and enable more families seeking home ownership the opportunity to purchase a home. Even with the higher mortgage insurance on FHA over the past year and the new changes coming soon, FHA is often the best option for many families to become home owners.
Here are some comparisons between FHA and conventional mortgages that I sent last March in answer to a similar question.
Property: The FHA appraisal includes a somewhat more detailed inspection than conventional. FHA appraisers will call out items that require repair before a loan can be funded, typical items are interior or exterior paint that is chipping, peeling or scaling that must be scraped and repainted, water heaters that are not properly vented above rooflines, have earthquake straps and/or are sitting on the ground, heating systems must be functional and adequate for the size of the property, any cracked windows must be replaced. Other items such as holes in the wall, missing floor coverings, missing sinks, would need to be repaired for either FHA or conventional mortgages. The basic rule for FHA and property requirements is any issue with the property that is considered a health or safety issue must be corrected.
Condominiums: Many condominium buyers are perfect candidates for FHA financing, but many condominiums are not FHA eligible. FHA maintains a list of approved condo homeowners associations (to see if a condo is approved or not go to the HUD condo website). In 2010 FHA tightened condo criteria and removed thousands of HOAs from the approval list requiring them to get reapproved. Conventional loans also have requirements for condos but they are a bit less stringent.
Loan limits: Some counties enjoy a higher loan limit for FHA than for conventional loans with a maximum single family loan up to $729,750 as opposed to the conforming limit of $625,500.
Down payment: The minimum down payment for FHA is only 3.5%.
Income qualifying: FHA allows non-occupant co-borrowers that are family members and use what are known as “blended ratios,” meaning that the income to debt ratios of the primary applicant who will occupy the home do not matter as long as the total ratios fit the guidelines.
Gift funds: FHA and conventional mortgages allow gift funds for down payment and closing costs to come from a relative or employer.
First time buyer: FHA financing is not limited to first time buyers, any qualified applicant can use FHA financing to purchase a home regardless of whether it is their first home or fifth.
Occupancy: FHA financing cannot be used to purchase investment property or second homes.
Location: FHA is not restricted to any geographic location, the only restrictions based on the property location is the maximum loan amount for the county where the property is situated.
Mortgage Insurance: Required on all FHA mortgages regardless of loan to value. With conventional mortgages there are options to finance the mortgage insurance premium or pay a monthly premium; if paying monthly it is possible in the future to have the premium and insurance discontinue. With FHA there is a financed mortgage insurance premium AND a monthly premium. The rates on both the upfront and monthly have increased significantly over the past few years and effective with loans after June 1, 2013 the monthly premium is paid for the life of the loan.
Credit scores: FHA guidelines require a credit score of 580 or greater for maximum loan to value, however many (most) lenders have an overlay on the credit score to require a score of 620 or greater. Most conventional lenders, and all mortgage insurance companies, have higher score requirements and charge higher rates for lower credit scores.
FHA financing has more paperwork to sign than a conventional mortgage but otherwise is generally an easier qualification process.
Lots of big news this week that impacts mortgage rates. One relevant piece of news was the release of the Consumer Price Index for March. A reflection of the prices being paid by consumers, CPI is also a reflection of economic activity. In March CPI increased only 0.1% over February. This is a worrisome number, while welcome for consumers buying bread, shoes and appliances that they are not paying any more than they were the month before, the lack of increase in prices shows a lack of overall consumer activity and economic growth. That was followed by the release of leading economic indicators for March which was a decline from February; further affirming our economy is wallowing.
Several years ago in the Weekly Update I was writing of concerns that our economy was facing potentially damaging inflation due to the fiscal and monetary policies of the federal government and Federal Reserve that was pushing up to $3 trillion per year into the economy. Now four years later the policies continue to add over $150 billion per month to the economy and we still have no inflation and limited growth. This signifies a significant problem with our economy. Where is all that money? Why is it not circulating through the economy creating growth and higher prices? How fragile is the economy and the psyche of those controlling business and productivity decisions and consumers, will it survive any reduction in the support being applied since 2008?
Are you tired of the “buy gold” ads on television and radio programs you listen to regularly? The premise has been using gold as a hedge against future inflation and the price of gold has increased dramatically over the past several years. This week gold saw its first serious price decrease in over two years, losing over ten percent in a few days. This has little bearing on mortgage rates and markets but it was an interesting anomaly in the gold market that has been fairly steady going up for several years.
There is some good news this week. Home sales in California are hot. Across Southern California median home sales have exploded since last March. Los Angeles County median price is up 24.2%, almost $75,000, to $380,000 in the past year and Orange County is up 26.3%, over $100,000, to $505,000. These large increases reflect the upper end of the markets are starting to sell as median price is price in the middle of the market not the average price. (For those who were not paying attention in Mr. Bartlett’s math class, the median of 1, 3, 7, 8, 11 is 7, the middle number whereas the average is 6.)
The data released this week confirms that our housing markets are the center piece of any economic growth that is going on. Just as housing pulled the economy into the Great Recession it looks like housing may lead us to recovery. With prices rising and equity being gained by homeowners we are seeing something that has been scarce for the past several years: the move up buyer.
Rates for Friday April 19, 2013: Rates are flat from last Friday, but “soft” and there is more indication that rates will drop than increase. FHA rates are such that at the lowest rate most or all closing costs are credited back to the borrower, i.e. no points and no fees.
30 year high-balance conforming 3. 5% FLAT
30 year FHA 3.25% Credits for closing
30 year FHA high-balance 3.50% Credits for closing
Once again our nation has been attacked by terrorists and our prayers are with all affected. As I write this the FBI and local law enforcement are engaged in a manhunt for the surviving bomber, our deepest hope is that the manhunt concludes without any more civilians or public safety personnel being harmed. Our criminal investigators are so amazing in how quickly they flushed out the perpetrators of Monday’s attack, thus sending the message that if you perpetrate acts of terror in the United States you will be brought to justice.
God bless the victims of the attack , their families and the citizens of the Boston region who have endured the attack and the subsequent chase for the fugitives.
If you are in the Long Beach area it is once again beautiful weather for the Grand Prix races and events.
Question of the week: Why do I need title insurance?
Answer: This is a common question I have been asked my whole career and it has come up in a few conversations lately as more new home owners enter the market. Every buyer and seller in a real estate transaction sees charges for a title insurance policy, but few know what the purpose of the policy is, other that something gets insured. Is it necessary? Like all insurance, only if you need it and if you need it you will be very glad to have it; like auto or homeowner’s insurance.
Simply put title policies insure that things are what they seem. If you are buying a home the title policy is insuring that you are the rightful owner, that no one can come later and claim ownership of your property. If you are a lender making a loan secured by real property the title policy insures that your lien has a certain priority on title and that the only liens against title are documented and disclosed. Title insurance covers any title issues that occur up to the date deeds are recorded the policy is in effect, it does not cover any issues that occur after your transaction, those are covered by the next policy when you sell or refinance.
Throughout the years I have heard many complaints about the need for title insurance and the cost relative to what is being provided. A common complaint is that most title policies insure the work that title companies have performed before, so why charge so much. Another complaint is that title policy claims are so rare that the fee, or premium, should be lower. Like the excellent driver who has no tickets or accidents on his record, most homeowners, particularly in areas where the housing stock is older and has transferred several times over the years with each transaction requiring a new title policy, the purchaser of title insurance wonders why the expense for insurance that likely will never be used. Then the excellent driver with the perfect record gets in a bad accident caused by an uninsured driver; how glad is he that he has quality auto insurance and has kept up the premiums? Similarly the homeowner that suddenly faces a title challenge is glad to have paid the title premium at closing.
When title insurance companies do pay claims they are usually very hefty, think tens or hundreds of thousands of dollars. Because of this most of the revenue title insurance companies collect do not go to paying claims, in fact the industry average is that only about 5% of premium revenue goes to claims compared with approximately 70% for auto insurance. Title insurance companies spend the bulk of their premium revenue on loss prevention, i.e. research.
What if the owner of your current home purchased the property eight years ago from a seller who had a lien against the property that was recorded improperly in the county records and that lender stepped forward to collect on your home and possibly force the sale? What if you purchased your home from a seller with an IRS tax lien that was unpaid? How about an estate that sold a property that was later challenged by an heir as being improper and a judge agrees? Each of these could be a very legitimate claim against a title policy that could lead to a very large payout for the title company.
Even more challenging for title companies today are bank foreclosures and short-sales. Lenders that hold seconds are finding out that some properties are transferring without their consent to pay off and are coming back to the enforce their liens as unsatisfied. In such instances the title company that insured the sale and that all liens are satisfied would have to make restitution to the lien holder.
Title policy claims are rare because of the loss prevention that is performed by the title company during the escrow or settlement period to investigate the property, seller, liens against title and other factors that may lead to a claim down the road. Unfortunately you will not know if the title company, in particular the title officer, did a good job investigating the title until you find someone making a claim against your title. This is why it is critical to have a title officer who is experienced and knowledgeable. Over the years I have had perhaps three or four clients with a title claim. Easements for shared driveways, a piece of vacant land included in a sale that maybe wasn’t, power lines, even fences, have been issues that have cropped up.
Far more prevalent over the years, perhaps three to four times a year with increasing frequency in our current bank controlled sale environment, are title issues that are discovered and corrected during escrow. Divorce settlement with a recalcitrant spouse, estate issues, private party second from a prior seller, occur once in a while. Of increasing frequency are the issues caused by the surge in foreclosures, which is likely to increase dramatically following the news this week. Your title policy premium pays for all the work done by the title company prior to closing so they can insure you are getting what you think you are getting, clear title. And if you don’t it is their obligation to pay to correct any claims that may arise later.
Increasing the challenge for title companies has been the surge of “flip” transactions the past several years. With an individual, or group of investors, purchasing a property at a foreclosure sale or on the open market, transferring to an LLC or partnership, rehabilitating the property with lines of credit secured by the property and or the temporary holding company and then selling the property, taking investors off title, etc. the claims and issues have increased for title companies—and therefore the diligence in their research to ensure that when Mr. and Mrs. Wilson by the home next to the Mitchell’s that they have clear title and ownership.
Are you absolutely certain there are no forgeries on deeds, unpaid liens, easements improperly recorded or illegal confiscations of title on your property?
Aren’t you glad you have title insurance?
Not a lot of news this week. The headline grabbers were retail sales (flatter than anticipated in March), unemployment claims (down from last week), consumer confidence (flat) and Producer Price Index (negative for March). Added up and the news is same-old same-old with nothing to spur rates higher based on good economic news forecasting solid growth in the near, or medium, future. Yet nothing to indicate rates will go any lower either.
Our only semi-market mover was the release of the minutes from the Federal Reserve meeting. The big concern for many of us is what happens when the economy does start to grow with some strength. How rapidly will inflation hit the economy, potentially damaging it in a different way, and how will the Fed react. The minutes from yesterday showed that when activity picks up the Fed will divest itself of its holding of Treasury bonds first, and then its holding of mortgages---though it may hold onto to its mortgage assets until they mature or pay off. This is good news for mortgages in the future as a sudden reversal from buying to selling mortgages by the Fed would drive rates up fast and strong.
Once again I ask you to consider why our economy is so flat with $80 billion per month in stimulus money from the and $80-90 billion in federal deficit spending Fed going into the economy. There is a lot of news and opinion that keeps shifting the focus from small issue to small issue to make them seem major, but the real issue is trillions of dollars created out of thin air and put into an economy that remains stagnant as we approach the fourth anniversary of the end of the recession. Why is our economy stagnant and not growing with strength and endurance? It is not for lack of money.
Rates for Friday April 5, 2013: Rates pulled back a little early in the week following the nice dip at the end of last week. Regaining some momentum later in the week we are in a very good range that should see rates remain at current levels for the near future. High-balance gives a little back from last Friday’s low, other rates remain flat.
30 year high-balance conforming 3. 5% Up 0.125%
Yesterday I was at my daughter’s elementary school and principle had an assembly for the fifth graders, who just returned on Friday from a week off. At one point as he encouraged them to remain focused and continue their efforts in the class he said, “we have about seven weeks of school left.” It seemed like half the kids let out a small exclamation of excitement as to how little time is left before summer vacation.
Half the kids let out a stifled groan as to how much time is left until summer vacation.
Perspective and perception impact us at every age.
Dennis C. Smith, California Dept. of Real Estate Broker #00966315 Stratis Financial Corporation, California Dept. of Real Estate Broker #01269597
Dennis C. Smith, California Dept. of Real Estate Broker #00966315
Stratis Financial Corporation, California Dept. of Real Estate Broker #01269597
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