SF Mortgage Spot

I attended a seminar by attorney Andy Sirkin today in which he updated us on the latest and greatest in "TIC Country" as he called it.  The seminar was presented to the Zephyr Real Estate agents, and I believe I was the only mortgage broker in attendance.

Some highlights:

1.  The best financing right now is offered by group -- not fractional -- loans.  This is because fractional loans are offered by commercial lenders and right now the whole commercial lending world is in the tank.

2.  Andy defined for us the four areas where it will be impossible or nearly impossible to convert a building if a protected tenant has ever been evicted for other than just cause (i.e., the eviction was due to owner move in, gut rehab, etc. and NOT for non-payment of rent.)  In general, if a protected tenant has been evicted after May 2005, the building can never be converted.  Period.  If such an event happened after 2000, the process will be nearly impossible, and when Andy says something is nearly impossible, that means it really is impossible!

3.  He also updated us on how the lotteries have been going. Generally, if a group has been in the lottery for at least 7 years, they will end up in Pool A and have about a 90% chance of success the next time they enter.  If they end up in Pool B (which means everyone who has been in less than 7 lotteries), their annual chance is less than 2%, and that chance wil decrease each year, as the pool gets a little bigger each year.  TIC purchases were prolific in 2004-2007, and the City will be working through that group for years to come.

4.  We also received an update on the TIC conversion process overall.  The process now takes about 4 months, inspections can be started even while occupancy is being established, and costs are about $20,000 exclusive of the actual construction work that needs to be performed.

Over the past months, I have been telling clients not to worry too much about losing a government program that has greatly helped our San Francisco housing market,  namely the "temporary" Fannie Mae/Freddie Mac/FHA loan ceiling of $729,750.  Industry insiders expected the limit to be extended, and only one of our lenders (Suntrust) was warning us to submit loans over $625,500 by a certain date.  We thus felt pretty confident that the increased limits would be extended.

Without the increase, Fannie/Freddie/FHA loans here would have been capped at $625,500, which is still higher than the $417,000 that applies to most of the country, but not enough to help people looking in the $700k to $1M price ranges that are so common here.

Yesterday, we learned that legislation was approved by both houses of Congress to extend the "temporary" limits to December 31, 2010.

We are still waiting to hear whether the $8,000 tax credit will be extended.

San Francisco DALP Alert -- The Program Has Been Eviscerated!

We just received notice from the City that the DALP program is running low on funds and has been modified to "preserve" those funds.  While well-intentioned, it's my opinion that the changes made by the MOH are wrong-headed and have made the program completely unworkable.  

First, the City has lowered the income limits -- from $81,300 for a single person down to $67,750, and a drop from $92,950 for a couple to $77,450. Right off the bat, that erases about $90,000 in purchasing power.  That's right; I just ran the numbers, and, all else being equal, someone earning $81,300 could qualify to purchase a home for $490,000, but someone earning only $67,750 could qualify to purchase home for only $400,000.

Second, the City has dropped the maximum loan from $150,000 to $60,000; say goodbye to another $90,000 in purchasing power. 

Bye bye.

Third -- and this is the worst change -- loans will only be given to those purchasing REO's or short sales.  That's right, absolutely no down payment assistance from the City unless the property is bank owned or in foreclosure.

On its face, the City's reasoning seems sound.  The memo we received from Myrna Melgar, Director of Homeownership Programs for the Mayor's Office of Housing states, "The downpayment assistance program has played a crucial role in stablizing neighborhoods most deeply affected by the foreclosure crisis, with over half of our funds going to households purchasing short sales or foreclosures.  MOH is therefore restricting limited funds to stabilize those communities with the greatest need."

Now think about it:  is the City saying that the only way people will buy bargain-priced homes in the more marginal neighborhoods is if they receive a helping hand from City coffers?  This defies the reality that real estate agents face every day:  there is always a vibrant market for starter homes in starter neighborhoods at starter prices.  Even when starter home were priced at $750,000, there was an active (and crazy!) market for them.  

And it's only recently that much of the starter home inventory has finally been sold off and prices are stablizing.  But those sales would have been made even without the DALP program. 

Winding up 2009, now that supplies are lower, demand is high again for starter homes.  There will be no problem selling off the REO's and foreclosures with or without the DALP program.  Those homes will either be bought up by worthy first-time buyers or by investors who  will fix them up and sell them to worthy first-time buyers, but they will be sold and the impacted neighborhoods will be stabilized.

I recently interviwed Charlotte Erwin at Zephyr Real Estate who said, "Those changes just don't reflect reality.  Short sales and foreclosures are the hardest deals to close, and only about 20% actually end up closing.  I have clients who have done all their homework, have taken the DALP classes, and who will now be crushed that they are now supposed to try to hit a nearly impossible target.  These changes are not likely to result in a positive outcome for my clients."

I think the fairest thing the DALP people could have done was stick to a "first come, first served" program.  First-time buyers can understand that a program has run out of funds, but they cannot understand why the City would eviscerate a program with no good reason.

What If I Don't Qualify for My TIC Conversion Loan?

These tough economic times are hitting TICs just like every other type of property.  Many TIC buyers between 2003 and 2007 purchased their building with an 80% first mortgage and a 10% equity line or second mortgage, and now find their equity position of 10% is in grave jeopardy because their building has lost value.

Another problem TIC owners can face is an unexpected job loss and all the problems that go with that.  Even if the TIC partner is able to pay the monthly payments from savings, job loss can cause real problems when there is a need for the rest of the group to move on to complete the conversion or simply to take advantage of a lower interest rate.

As a TIC mortgage specialist, I am often asked, "What if my condo conversion is complete and I'm now ready to refinance into a separate condo loan, but one of my partners has lost his job?  What happens?  Do I need to wait until my TIC partner gets another job?"

According to TIC attorney Andrew Sirkin, the answer is "no".  Under most TIC agreements, any one of the TIC partners can force a sale simply be declaring (in writing) that they plan to refinance.  If the other partners are unable to participate in a new group loan, they must sell.  The same applies if one TIC partner wishes or needs to sell his unit; by declaring her intention in writing, and setting forth a timeline ("I will be selling my unit within 6 months"), the other owners will also be forced to sell if they cannot qualify to participate in a new loan with a new buyer.

Yes, this is a horrible result for the party who lost his job and now may face losing his home.  If the parties have enjoyed a good relationship in the past, one would hope something less harsh could be worked out.

If you are faced with this situation, please be sure to check your TIC agreement for details.