Question of the week: I read where “affordability” remains high. What is “affordable” about the $350,000 homes in my neighborhood?
Answer: Affordable or affordability in articles about housing refers to the number of people who can afford the median priced home in a region. Different organizations, such as the California Association of Realtors, calculate the affordability index for a state or region. There are different ways to measure affordability but they generally fall into one of the following calculations.
Using the median price home in the region and the current thirty year fixed rate income the index determines what percentage of families can afford to purchase the median home based upon family income. In the first quarter of 2012 using this calculation 73% of California families can qualify to purchase the median priced home with 20% down.
Another way to measure affordability is what price home can the median income for a family purchase and is it above or below the median price. This formula is more dependent on the current thirty year rate. Using approximately $60,800 as the median income for Los Angeles County the affordability is approximately $300,000, right on the Los Angeles County median price for April as reported yesterday by DataQuick.
During the climb in housing prices, even with low rates, into 2007, the housing affordability index for Los Angeles and Orange Counties was below 30% and the median income could purchase a home at approximately 70% of the median home value in the area.
Due to the combined fall in housing prices and interest rates affordability in California is at historic highs. The seemingly paradoxical relationship between a drop in the percentage of families that own their own home and the increase in affordability showing that more families can own homes demonstrates the difficulties still facing the housing markets in recovery. Affordability is up mainly due to low prices caused by the large supply of inventory due to foreclosures and defaults, which is also why homeownership is at a two decade low.
Because of the affordability and the slow-down in foreclosures being put on the market, home prices are stabilizing in many areas, which is a precursor to values beginning to rise. This will result in a drop in the affordability unless household incomes are able to keep pace with home prices. With the fragile markets still subject to pressures from employment, defaults and foreclosures being held back by banks the historic affordability index is the primary stabilizing force that has kept prices from falling further in California.
This past week I posted on my Facebook page an article from the Wall Street Journal that asked, “Is Now the Time to Buy Your First House?” in which two analysts answered the question with one arguing “yes” and the other “no.” I’m with the former given the low prices that are stabilizing locally and cheap money with rates as low as they are.
Have a question? Ask me!
Take this drachma and….well just take it and do what you will with it because it may not be worth they papyrus it is printed on soon. It is official that Greece does not have a government and will hold elections in June to see if a coalition can be formed to govern the country, and most importantly to other nations, investors and banks, whether the new government will abide by the treaties and agreements signed by the prior government to prop up the Greek economy with loans and bailouts. One of the leading contenders to lead the new government stated on Thursday that if Greece’s European neighbors do not renegotiate the terms of the loans to the country he will repudiate Greek debts. If this comes to pass the European banking system, the Euro currency and several European nations will come to the edge, or go over the edge, of insolvency. Uh-oh. Myself and many others are hoping the politicians in Sacramento have been taking notes on what has created the Greek economic and fiscal crisis, but given their actions and statements it is readily apparent that our hope is misplaced.
More money from the Fed? That is the question being asked this week as the Consumer Price Index for April came in essentially flat, no growth, no inflation. The economy needs some inflation to encourage growth and job creation. Lack of inflation indicates a lack of spending and demand. Not only did April see no increase in prices but retail sales were also very flat. With the tepid news following the disappointing data on Gross Domestic Product growth in the first quarter the analysts and pundits are wondering if, and some not if but when, the Fed will announce QE3 and another round of pouring hundreds of billions of dollars into the economy in yet another attempt to wake up the economy. Minutes released this week from the last meeting of the Fed’s Board of Governors indicate that there are a few voting members of the Fed who are wondering the same thing, when not if.
Hit bottom. With the issues going on in the European and domestic economies plus whispers of more money into the economy from the Fed mortgage rates have once again hit a new low. Investors have been pouring money into U.S. bonds, both government and private, lowering yields (i.e. rates) to protect their funds from potential losses in Europe and in American companies subject to international affairs. The cliché is that all politics are local, the same can be said of all commerce these days.
Rates for Friday May 18 , 2012: Last week I mentioned that rates should be lower than they are due to the sharp increase in prices for Mortgage Backed Securities over the past month. This week MBS continued to climb for reasons stated above. Short of some major announcement to cure all of Europe’s ills over the next few days as the G8 leaders gather at Camp David and NATO leaders in Chicago, there is little to move rates up with the exception of some profit taking.
FIXED RATE MORTGAGES AT COST OF 1.25 POINTS
30 year conforming 3.375% Down 0.125
30 year high-balance conforming 3.625% Down 0.125
30 year FHA 3.25% Down 0.125
30 year FHA high-balance* 3.625% Down 0.125
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.
* Current rates include credit towards closing costs, call for quote on rate and credit.
I jinxed myself.
Last week I wrote about doing an insurance check-up and balancing the risk of using your deductible versus the lower payment for your premium if you choose a higher deductible. Mother’s Day morning on our way to church we were hit on the side of the nationally travelled Honda Odyssey by a driver who felt the customary reaction to hitting someone is to drive away. We followed the other driver long enough to give a description and license number to the Long Beach PD before pulling over and surveying the damage. Not much, but most likely enough to use up our $1000 deductible. Sigh.
At least no one was hurt, the damage does not impair any functions of the car and the girls will have a Mother’s Day memory forever, “remember the year we got hit on the way to church and….”
We are off to the Inland Empire this morning to celebrate Leslie’s mom’s 80th birthday, the changes she has seen in the world since 1932 when family entertainment centered on the huge console radio and not computer tablets and television shows recorded on microchips.
Have a great week,
Question of the week: Should I release my loan contingency?
Answer: No, not unless you are ready to fund.
Sometime ago the California Association of Realtors, who provide the standard contract used in most real estate transactions, thought it would be a good idea to amend the contract from stating that the offer was contingent upon the buyer being approved for financing to having a specific time frame within which the buyer has to obtain financing. To be more specific it has become customary for most agents to bind their clients into a seventeen day loan contingency period during which the buyer can invoke the contingency, declare they cannot get financing and cancel the contract and have their deposit refunded.
This seventeen day period begins the day the buyer and seller agree upon price and terms and is most often agreed to by the buyer and seller and their respective agents without consultation with the lender, consideration for the current lending environment, consideration for any complexities that may exist in the transaction, or other factors that have been challenges in the mortgage industry. Although there have been numerous articles, commentary, and media segments on the tightening of lending criteria and the challenges for even very qualified borrowers to obtain financing, for some reason agents continue to insist on writing offers for their clients with the loan contingency time frame and a short escrow period. Why? Most often because “it gives you the best chance to have your offer accepted.”
At the same time agents representing the sellers insist on these clauses because they feel they are protecting their seller; instead they are getting what they want to see instead perhaps of a realistic presentation of what will happen once escrow is opened.
Can we at Stratis Financial close a purchase escrow in thirty days? Absolutely. Can we confidently inform every client to remove their loan contingency in seventeen days? Not unless we have loan approval, loan docs and are ready to fund, because until then many factors can upset the approval process.
Here are several factors that can impair loan approval and require more time for a loan approval and closing:
· On condominiums inability to get proper documentation from the Homeowner’s Association in a timely fashion, or after receiving discovering the HOA is not approvable. For instance too many non-owner occupied units or dues that are delinquent to name two of several factors.
· Appraisal issues that underwriter calls out requiring work to be done on the property or additional comparable sales after the appraisal has been received at value. Recently we had on transaction where the underwriter noticed black spots in a shower and suspected mold infestation and required it to be cleaned and addressed. The file was otherwise approved, it was mold and the infestation was deeper than the seller thought, buyer cancelled and it took some time to negotiate the deposit back because she had removed her loan contingency and the appraisal contingency.
· Since April when the HARP 2 program for upside down homeowners to refinance was opened up applications throughout the industry have exploded in volume. As a result there is a backlog throughout the pipelines of everyone in the industry. It takes longer to get appraisals, get into underwriting, get approvals, get conditions reviewed, get loan documents and get funds for closing. While most of us in the industry give priority to purchases that does not mean that every purchase jumps right to the front of the line, there are still files ahead of it.
· Credit reports are good for sixty days with most lenders, as opposed to ninety days previously. If you are pre-qualified/approved at the end of March, enter escrow in the beginning of May and underwriting has your loan at the first of June they will pull a new credit report. Changes in FICO scores, increased balances, etc may change the approval and renew the processing of income, assets and/or debts.
· Every file must have IRS form 4506 completed and returned by the IRS prior to final approval. This form is sent to the IRS who returns a line by line printout of your tax returns. With the flood of applications into the system nationwide the IRS has been taking three to four times longer to return this form.
· The most frequent topic I write about, addressing the issue three to four times a year, is verification of funds. Too often, despite coaching beforehand, borrowers deposit untraced funds into their accounts. This leads to delays, and possibly denials, to trace the funds and ensure they are qualified for underwriting and approval.
Because of the limited timeframe contingency put into offers too often undo pressure is then put upon buyers to release loan contingencies on transactions with many moving parts and potential pitfalls that need to be ironed out to obtain loan approval. As my friend and co-worker David Pemberton who also has more than twenty years in the industry said as we discussed this topic earlier this week, “there is no reason to put increased pressure on a buyer in a transaction, especially in this environment and especially for circumstances often beyond their control.”
Sellers and listing agents pressuring for release of a loan contingency after seventeen days into an escrow on a transaction where they are aware of the issues and that the buyer and lender are working towards loan approval need to ask, what is to be gained by pressuring for release of this contingency and what are the consequences if the buyer does not, are you willing to try to cancel the escrow and start all over? In almost all cases with a properly prepared borrower this would not be considered a prudent course of action.
Another long time professional in the real estate industry, Marilyn Tyo with RE/Max told me about fifteen years ago, “escrows are like pregnancies, you have a due date given to you, sometimes the babies are early, sometimes they are late and sometimes they are on the date.”
More often than not escrows are delivered on time, however everyone involved in a transaction needs to take into consideration a myriad of factors influencing the process to ensure a positive result for all involved.
Communication, cooperation and understanding between and amongst all parties will result in a positive outcome.
Reaction has been a bit over the top to the news this week that existing home sales were up in April as well as the median price nationwide. I say over the top as I saw one “insider” opine that it signals the return of the housing market. After lower sales in prior months to have one good month and declare it as housing is “back” seems to me as if the Lakers had popped champagne and declared themselves champions again after they won game three of their series against the Oklahoma City Thunder. One game a series does not make and one month a market does not make—positive or negative.
Stocks have been battered this month as investors react to increasing data showing dramatic slowing in economies worldwide. European issues have been well documented but add the mammoth economy of China to the list of slowing economies and one’s concern ratchets up a bit. While stocks have lost significant value in May, fixed income investments, i.e. bonds, have benefited. Money has poured into U.S. bonds, corporate and public, and rates have benefited. As mentioned the past few weeks mortgage bonds have seen prices climb but lenders have not passed all the reduction in secondary market rates to the consumer. Faced with higher costs due to regulatory conditions and closer scrutiny from Fannie and Freddie, banks are increasing their margins between their buy and sell prices.
Looking ahead we are in a very narrow range on rates that appear to keep bouncing off a bottom several times then cracking through to a new low over the past several weeks. Depending on where we are in the “bounce” rates are up slightly, flat or down slightly but no major moves one way or the other. With the global situation I expect rates to remain in their current range for the near future, hard to see them going any lower as we have the dual factors of market resistance and lender reticence to pare off margins to lower rates.
Rates for Friday May 25, 2012: Friday’s before three day weekends generally see little movement in a positive direction as investors sell into cash for the long weekend so they don’t get caught short when markets re-open Tuesday. Rates are up a bit from last Friday’s lows on such activity on conventional, a slight drop in FHA high balance.
30 year conforming 3.5% Up 0.125
30 year high-balance conforming 3.75% Up 0.125
30 year FHA 3.25% Flat
30 year FHA high-balance* 3.5% Down 0.125
In many parts of the country where seasons are easily differentiated Memorial Day weekend is welcomed as the official start of summer. Pools open, fashionable women can begin to wear white, and many kids are out of school.
Amidst the gatherings and barbecues I hope everyone takes a moment to reflect on the gravity of the holiday, memorializing the men and women of the American armed forces who have lost their lives defending freedom and liberty. And not just ours as the people of Germany, France, the Philippines, Japan, Iraq and Korea among other nations can attest.
Here is a very good history of Memorial Day that you may wish to share with your children and grandchildren.
God bless those who have lost their lives so that we may remain the most free nation in history and a beacon of liberty for those around the world who are not as fortunate as ourselves to live in the greatest nation past and present.
Question of the week: Am I over-insured?
More people are probably over insured on their properties than under insured, and lenders are not helping to curb in the practice of over insurance.
For non-condominium properties, lenders require a minimum coverage of 80% of the replacement value of improvements on a property as stated on the appraisal. Insurance companies have their own software programs that determine what they believe the replacement value should be, not infrequently this number is less than the lender requirement and if this is the case the lender required insurance creates a situation where you may have more insurance than you need.
However replacement coverage of the improvements is not the only coverage on your insurance policy. The standard policy also have coverage for personal property loss, through damage or theft, and liability coverage should someone have an accident while on your property—say a slip and fall due to loose pavers on your walk or the neighborhood kid breaking his arm falling out of your orange tree while pilfering fruit. These coverages are also susceptible to over insurance and many homeowners do not review this portion of their coverage and the attendant premiums.
Every year you should review your insurance policies to ensure you are properly covered. Auto, home and life policies have varying coverages and premiums and most carriers will provide discounts for having more than one policy with them and also for periods without claims (except on life for which you will not make the claim but your heirs will). Are you paying for $500,000 in personal property coverage for your $50,000 in furniture, jewelry and other items? Do you have a $1,000,000 liability policy and your net worth is only $200,000? These are areas where you may be able to lower your annual premiums by insuring what needs to be insured.
One other area where you can save quite a bit on your policy is your deductible. The lower the deductible the higher your premium because the insurance company has to pay more to cover losses. A $500 deductible will have a higher premium than say a $1000 or $5000 deductible. Many are fearful of a high deductible as they do not want to come up with the additional funds should they have a claim. Weigh the chances of a claim versus the savings in premiums for a higher deductible. Most people find a deductible between $2000-5000 if offered is a comfortable limit with the savings they will receive.
If you own a condominium check your Homeowners’ Association to see what the master insurance policy covers. All will cover the structures that are jointly owned by the members of the association and will include some liability insurance. Some, not most but some, also have “walls-in” coverage which covers the interior of each unit, the drywall, flooring, fixtures, that are not covered by the standard policy. In the industry the “walls-in” coverage is known as the HO6 policy and is required on all condominium transactions with coverage being 20% of the loan amount.
If you have a separate policy on a condominium then you too should check your coverages for personal property, liability and your deductible.
Insurance is an integral part of the mortgage process as lenders naturally want to ensure that their collateral is insured. Review your policies to determine that you have the proper coverage.
Not a lot of action for economic data geeks this week. Early in the week consumer credit for March was reported and it jumped over $21 billion from February; the bad news for retailers is that only $5+ billion was in revolving credit the rest was student and auto loans. Yesterday initial jobless claims came in with little change, down 2,000, from last week’s number with 367,000 new filings for the week. Continuing claims continue to decline due to unemployment insurance expiring and forcing people off the rolls.
The action this week was political. In France President Nicolas Sarkozy lost his office to Francoise Hollande of the Parti Socialiste whose campaign was basically he would break the economic treaty Sarkozy had made with Germany that required France reduce federal spending—known in Europe as austerity. In Greece, yes we are back to Greece, elections left a mess and no single party able to form a government as no single party has anything near a majority*. The far left and moderate left parties may form a governing coalition whose basic platform is…..yes breaking the agreements formed by prior Greek government to cut federal spending. Because there is no government in Greece and the one that may form may reject prior agreements to reduce spending so the country can pay its debt, banks are stopping lending to the country which is quickly running out of cash (sounds like California).
Once again concerns about economic collapse in Greece, and now France, and Europe in general has investors worried and moving from stocks to bonds. The beneficiaries are borrowers, both the U.S. federal government and individuals. The losers are those who depend on European markets which are contracting and a recession is on hand in Europe once again with two months of shrinking economic activity. C’est la vie.
*(Sidebar: skip if you know or do not care about European Parliamentary governance. In most of Europe there are multiple parties, as such no one party can win a majority of seat in the parliament and therefore lift its party leader to the position of Prime Minister. Because of this two or more parties depending on the numbers agree to come together as a voting block and form a government, the leader of one of these parties is chosen to be the Prime Minister. When one of the parties feels slighted, desires more power or say in decisions or otherwise does not like what is happening it leaves the coalition and the government stops. Elections are then held and the process of cobbling together a majority across several parties begins once again.)
Rates for Friday May 11 , 2012: We see a drop in high-balance conforming and FHA rates from last Friday. Looking at the Mortgage Backed Securities chart for the past month we see a sharp increase in prices, but not a corresponding drop in rates. It appears there is a significant gap between what lenders are selling mortgages for on the secondary markets and what rates they are charging on new loans. Due to this gap there is a softness that could lead to lower rates or should keep them stable in the current range for some time absent some outside event or unexpected economic news.
30 year conforming 3.50% Flat
30 year high-balance conforming 3.75% Down 0.125
30 year FHA 3.375% Down 0.125
30 year FHA high-balance* 3.75% Flat
With Mother’s Day upon us I came to the realization today that I have lived my life with two wonderful mothers for almost the exact amount of time to this point in my life. My own mother who passed away this week in 1980 when I was 17 years old and my beautiful wife Leslie with whom I shared our 17th anniversary last September. Very much alike, my mom and wife share tremendous senses of humor, sharp intellects, huge hearts and wonderful friendships. Not to mention their abilities as mothers and wives. Loving, caring, willful, and strong they are my personal examples of the millions of moms that make this country exceptional and I have been blessed to share my life with both.
Happy Mother’s Day to all the moms out there, and an extra special one to Nancy and Leslie Smith. I only wish they were able to spend it together.
Question of the week: Why did I get a notification that my loan is with Fannie Mae? I thought it was with the lender we closed with.
Answer: This question comes quite frequently and most recently from a client who recently closed their refinance transaction and about a month later received a notice that their loan was now owned by Fannie Mae. This question also comes from clients who have had their mortgage for some time and are inquiring about a refinance who are in a limited or negative equity situation and are surprised to learn their loan is owned by Fannie Mae. (Note: Freddie Mac can be substituted for Fannie Mae, though fewer loans are with Freddie than Fannie).
As I do about every twelve to eighteen months in the Weekly Rate & Market Update, I will use this question as an opportunity to once again go through what happens to mortgages after they fund. If you are familiar with GSEs, MBS, AUS and other details of the secondary mortgage market you may wish to skip to the economic update below. If you are unfamiliar with these you may wish to take a few minutes to learn about the part of the mortgage industry that has the greatest impact on whether you qualify for a mortgage and what your rate will be.
First the acronyms I will be using. Fannie Mae and Freddie Mac are Government Sponsored Entities, or GSEs; GSE is used often to describe not only Fannie and Freddie but conventional mortgages. The GSEs issue Mortgage Backed Securities, MBS, to investors. Mortgage professionals and lenders run mortgage applicant’s information through the Automated Underwriting System, AUS, for the GSEs to get loan approvals.
With very few exceptions almost all the loans funded in the current market are approved and funded under the guidelines of FHA or one of the GSEs. In the case of the GSEs loan originators, such as myself, take the loan application data from a client and run the information through the AUS of either Fannie Mae (most often) or Freddie Mac. The AUS then issues us an approval or what amounts to a decline.
Lenders require that we have an approval on mortgages from one of the GSEs via their AUS before we can close a loan; this is because the AUS provides the conditions that must be validated by the lender in order for the GSE to purchase the loan.
Why does a lender care if they can sell the loan to Fannie Mae or Freddie Mac?
Liquidity. With a mortgage origination market of around $1 trillion, lenders cannot fund and hold all the mortgages they fund. As a result they bundle their mortgages into pools which they then sell to either Fannie Mae or Freddie Mac depending on the underwriting guidelines used to approve and fund the mortgages. While the loan is sold to one of the GSEs, the lender retains, usually, the servicing of the mortgage collecting the monthly mortgage payments. The lender retains a fee for the servicing and then passes along to the GSEs the remainder of the payments.
So where do Fannie and Freddie come up with almost $750 billion every year to buy these mortgages from lender?
They sell the mortgages; or rather they sell the returns the mortgages provide. Once Fannie or Freddie purchases a bundle of mortgages from a lender, they package that bundle with others and create a security known as a Mortgage Backed Security (MBS). On a daily basis MBS from Fannie and Freddie as sold on the market and investors purchase the securities. With their purchase the investor is getting the revenue generated by the MBS as a result of the thousands of homeowners whose mortgages comprise the investment making their mortgage payments. The investors determine the mortgage rates being offered by the lenders to you the borrower based on whether they are purchasing MBS at a premium, lower rates, or at a discount, higher rates.
With the money received from the investors the GSEs are then provided the liquidity they need to purchase mortgages from the lenders and the cycle starts again.
So when you purchase your home in Long Beach, California and fund a conventional mortgage of $400,000 through Stratis Financial, your loan will be funded with money from Stratis, who will sell it to a lender, who will sell it to Fannie Mae, who will sell it to an investor who could be a municipal pension plan for Omaha, Nebraska, a retiree in Fort Lauderdale or a mutual fund headquartered in New York.
Plenty of news this week confirming a stagnant economy that has been unable to provide sustained growth much less robust growth. Retail sales in April increased less than 1% from March, data from the manufacturing sectors show incremental increases. Non-farm productivity dropped in the first quarter and labor costs increased. Combine this data with the drop in GDP growth for the first quarter and we get an economic morass not ready to generate higher economic activity, productivity and jobs.
Speaking of jobs, don’t be fooled by the headlines tomorrow or what is coming across the transom from internet media reports today on the unemployment reports. Foremost on most reports will be the 8.1% unemployment rate, which should be below 8% in November. The primary cause of the drop in the unemployment rate is not new hiring but rather people ceasing their search for work and/or falling off the unemployment insurance rolls. The Labor Department unemployment rate is based upon a phone call to households in a survey that asks if anyone in the home is not working and if they are seeking employment. If you are not working, want to work but have become discouraged with your searching for a job for three months and decide to quit trying then you are not considered unemployed.
Shrinking employment growth continues. After closing 2011 with three months of private sector job growth of over 200,000 workers per month April saw a net increase of only 115,000 jobs in the economy. Demographics require over 185,000 new jobs every month just to retain the same size labor force, adding only 115,000 jobs fails to reach stable over all employment in the economy. If there is a ray of light in the jobs numbers for April it is that overall government employment shrunk by 5,000 jobs nationwide. With the bloated payrolls of local, state and federal governments being supported by taxes on private sector incomes any reduction in the size of this workforce is a long term benefit for the economy and future productivity and growth.
Rates for Friday May4 , 2012: With the constancy of tepid economic data this week investors have seen no reason to invest in stocks and have put their money into bonds and Mortgage Backed Securities. Lenders are holding on to some of the gains but there has been a tick down in conventional rates from last Friday. A very stable market that seems to be a bit over-bought and ready for a correction, don’t be surprised if rates next Friday are a bit higher if there is a sell off for profit taking by bond investors.
30 year conforming 3.50% Down 0.125
30 year high-balance conforming 3.875% Flat
30 year FHA 3.5% Flat
Cinco De Mayo tomorrow, until I came to California it was just May 5th as my knowledge of Mexican and Latino culture was precisely nil. My mother was a native Californian and growing up in Oklahoma and the East Coast for us Mexican food was El Paso boxed taco shells filled with ground beef seasoned from a McCormick’s seasoning packet, some chopped tomatoes, lettuce and grated cheese on top and we were eating Mexican.
When I first went to a Mexican restaurant in Pomona with my new friends at college in September 1980 I had no concept of what a burrito, chimichanga, tostada, enchilada, civiche or even salsa were. Thankfully my years at college and since have allowed me to fully enjoy a wide breadth of Mexican and Latinon cuisine. Ole!
Dennis C. Smith, California Bureau of Real Estate Broker #00966315; NMLS #296660
Stratis Financial Corporation, California Dept. of Real Estate Broker #01269597; NMLS #238166