SF Mortgage Spot

As I have mentioned before, FHA loan limits are higher for multi-unit buildings.  These can either be purchased as tenants in common, or to live in one unit and rent out the others.  Here is a story from today's New York Times that shows how this can be done successfully in San Francisco, with a minimal down payment:  only 3.5% down!

Please note that our firm is featured rather prominently in this article.  Kudos to us!

http://www.nytimes.com/2009/11/20/business/20limits.html?pagewanted=2&_r=1&emc=eta1

Just a reminder:  as you know, the Fannie Mae loan limit of $729,750 on a single family residence,  has been extended through December, 2010.   Beyond that, the limts on 2 to 4 units have also been extended as follows:

2 units:  $934,200

3 units:  $1,129,250

4 units:  $1,403,400

These limits apply both to Fannie Mae and Freddie Mac conventional loans as well as FHA-insured government loans.

You may be hoping that today's low 30 year fixed rates will reduce your monthly payments on your TIC unit with a simple refinance.   Yes, it would be great to convert to a more predictable 30 year fixed rate loan while you wait another year for a more favorable lottery.  

But don't get too excited.  Some owners will benefit by the change, but most won't, not unless they purchased their unit long ago or with a sizeable down payment.  

Under the extended guidelines, the maximum loan to value on a 2 unit building is 80%, but on a 3 to 4 unit building, it's only 75%.  Translation:  if you purchased your TIC interest within the past tive years with 10% down, it's unlikely your loan to value is now low enough to take advantage of a 30 year fixed rate loan.   Secondly, if you obtained an interest ony loan, even if you have the equity (a low enough loan-to-value ratio), you probably won't like the payment jump from the interest only payment to the fully amortized payment. 

Feel free to contact me if you'd like me to run a scenarios for you to see if refinancing will make sense under the extended loan limits.

I read Ben Bernanke's most recent speech to the Economic Club of New York with great interest.

He offered three reasons that banks are being so Scroogelike with their money.  I offer these explanation not to excuse the banks, but to encourge you, dear borrower, to not take it personally when it seems your bank wants to do anything BUT lend you money!

1.   Some banks are keeping more liquid assets on their books, at the request of regulators.  That reduces cash available to lend.  Analogy:  while you'd love to lend your nephew part of his college tuition, you decide it's smarter to have a bigger cash cushion in these difficult times.

2.  Banks have already sustained large losses, and don't know what future regulations will be enacted; they don't want to take on additional risks until there is more certainty.  Analogy:  you lent your college roommate money to buy her wedding dress but she never paid you back.   So the next time a friend in need calls, you are not exactly in the mood to be  so trusting again.   

3.  Lenders are still having trouble finding a secondary market to securitize the loans already on their books.  Translation:  it's harder for banks to find fresh money to lend out.  (Bailout money is supposed to help, but that's different than creating a secondary market, which will be durable and predictable, which bailout money is not!)

To sum up, banks recklessly lent out money that never got paid back, there have been repercussions, and now they are afraid to make foolish mistakes again and lose even more money.  No wonder they are so grouchy!

Does that make you feel any better?

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.

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.

How Do The Points Work?
Loan rates typically are quoted in terms of rates and points, e.g., "5.75% at 0 points" or "5.50% at 1 point", or even "5.25% at 2 points".  Points are fees you pay in advance to receive a lower interest rate in the future. One point equals 1% of the loan amount.  The more points you pay, the lower the rate.

Many people who purchased homes before 2008 did not pay points; these days, most lenders are pricing their loans so it's appealing to pay the points -- i.e., the rate is a lot better when you pay at least one point than it used to be. 

Why have lenders chosen to change their pricing model?  Frankly, because they lose money when people quickly refinance in and out of loans -- lenders do not recoup their costs of lending or turn a profit until three or four years into a loan.  As a result, they are now "incentivizing" borrowers to invest in their mortgages upfront hoping they will not be so quick to refinance if rates drop.  

You can look at this another way:  banks now want to take their profit upfront; they don't want to wait to see whether your loan will perform profitably in a few years.    

What Are The Advantages of Paying Points?

What Are The Disadvantages of Paying Points?

You may not save enough in your monthly payments to recoup the points you paid in advance.

You may not be in the home long enough to recoup the points you paid.

If you refinance into a new loan within the first few years, the points you paid will not be recouped.

You may not be able to afford to pay points (it’’s not unusual for people to use all of their savings to cover the down payment and closing costs!)

 

As many of you know, New York Attorney General Andrew Cuomo has set out guidelines for new appraisal standards, nicknamed HVCC (Home Valuation Code of Conduct).  Fannie Mae and Freddie Mac have chosen to follow these guildelines and now we are all stuck with the result:  a huge mess that is hurting consumers and doing nothing to stablize the housing market!

The guidelines require all appraisals to be ordered by "disinterested third parties", also known as AMC's (Appraisal Management Companies).  Six or seven huge, national entities (and remember, real estate is local), have been formed as AMC's and they have 99% of market share at this time.

Whereas mortgage lenders formerly could order our own appraisals, we now need to order through the AMC's.  Whereas our appraisers collected about $350 for a single family home appraisal, the AMC now collects about the same $350, but keeps 30% of the fee as its profit, and pays the appraisal 70% of that fee.   That means AMC's are hiring appraisers who are willing to churn out appraisals for $245 each!  Those appraisers tend to be less experienced and less capable than the appraisers we formerly worked with and more likely than not, they are from out of town. In San Francisco, that is a big deal, because our properties not cookie-cutter tract homes, but a true mix of styles and vintages.  In San Francisco, values can and do change from one block to another, from one view to another, from one vintage to another.  

These AMC appraisers are of course inundated with business and are unable to devote the required time to each appraisal.  The results have been as we predicted:  the quality of the appraisals has diminished, the reports take a lot longer, there is more red tape, and consumers often need to pay for more than one appraisal before an accurate job is done --  if then. 

Many appraisers who won't or can't work for the reduced fees have been put out of business, or they are doing "comp searches" for us for $50 per job.

Because the AMC appraisers get paid regardless of the quality of the work, they are underappraising many homes because they cannot or will not take the time to do a proper job and find the best comps.  Or, they are sending out trainees who are underappraising the homes due to lack of experience and knowledge of specific neighborhoods.

If a client wants or needs to refinance and the appraised value comes in too low, he has no choice but to pay for a second, or even a third, appraisal. 

Another problem is that appraisals are now taking much longer to complete, and we cannot always lock in a rate until the appraised value is known.  That's because the value affects the "loan to value" ratio which in turn affects interest rates ( an 80% loan to value mortgage costs the borrower more than a 60% loan to value mortgage.  I would hate to quote a client one rate, believing the loan to value is low, and then have to turn around and tell the client his rate will be higher than what I first quoted, because the loan to value ratio is higher.  Sometimes the rate may be so much higher than a refinance is not even viable.)  While we are waiting to learn the appraised value so we will know the loan to value ratio, if rates go up, the consumer loses because we were not able to lock in sooner.

The end result is consumers are paying more for inaccurate appraisals delivered more slowly than ever.

The idea behind the guidelines (called HVCC) was good:  to prevent mortgage fraud and inflated appraisals.  However, lenders have always had the power to review appraisals by checking comps themselves or by ordering review appraisals.  Historically, this was often done by responsible lenders.  That would certainly make a lot more sense than putting small business owners out of business and causing home buyers and refinancers added expenses and worries.

Thousands of real estate industry professionals are gathering forces to repeal the HVCC Guidelines and I am askingyou to sign the petition, especially if you have been negatively impacted:

Please visit:  www.hvccpetition.com and let your voice be heard!