Bill Before the House May Make Houses Harder to Afford

From my in-box today:

“A draft bill to be discussed at a House subcommittee hearing today would raise the minimum down payment to 5% and would also make a significant cut to the maximum size of loans backed by FHA in many parts of the country. The maximum FHA loan size in expensive parts of the country is already scheduled to go to $625,500 from $729,750 on Oct. 1. However, in areas where home prices are more modest, that limit is scheduled to fall as low as $271,050. The bill would allow those limits to fall even more—to 125% of a county’s median home price.” -Russell Doi, RPA Mortgage

These changes will be a hurdle for many buyers. Buyers with great cash flow but low assets may find themselves pushed out of the market. Buyers basing their price range on the current $729,750 loan limit may have to lower their sights by more than $100,000.

Buyers searching in the $800,000 price range and looking to use the maximum loan, your window of opportunity is closing. All buyers with low down payments should consider buying now. With buyer-friendly legislation, interest rates below 5% and home prices relatively low, now could be the best time to make the move.

This may also create a temporary market surge for sellers who can come quickly to the market, as buyers look to capitalize on the existing rules. Particularly if your home is in a price range that benefits from the large conforming loan limit (usually properties over $800,000) and for homes in the "starter" price range (under $500,000 in this area) where down payments tend to by lowest. Houses sell for the highest dollar amount when they appeal to the largest amount of buyers. The proposed changes are enough to restrict affordability and move some currently active buyers to the sidelines.

Bigger Down Payments Create Challenges for Larger Homes

Some fast facts that make smaller homes easier to purchase in today's precarious lending market:

The current conforming loan limit is set at $729,000, but expected to reset as of January 1st, 2009 down to $625,000. Traditional financing is available for conforming loans with only 10% down. Down payments as low as 5% will still be possible under $625,000 with the help of FHA. The last day to qualify for the $729,000 loan is December 1st, 2008. If you act now, a qualified FHA buyer with 5% down ($38,250) can buy a $765,000 home and receive a reasonable conforming loan rate. After December 1st, qualified buyers with a 5% down ($32,500) can only buy a $650,000 and still receive a reasonable conforming loan rate.

Jumbo loans up to $1,000,o0o currently require a minimum of 25% down payment. Loan amounts from $1-1.5 million will require a minimum of 30% down. This means a jump today from a conforming $729,00o home to a $730,000 loan will require 20% more in down payment.

Today's buyer with $38,250, looks to buy the $765,000 house under the conforming loan guidelines. Say the buyer can not find a home that suits him in the price range. December first comes and goes. Time for a visit to the lender in the hopes of increasing the price range to $835,000 to meet his needs. Under the new Jumbo requirements the buyer will need 25% down ($208,750) to qualify. This buyer's wish to increase his search parameters by $70,000 is going to require digging deep. He will have to come up with an additional $170,500 down payment in the new year to accomplish his new search. Add volatility of the interest rates and the monthly payment may also increase dramatically even if the loan amount has not increased due to the larger down payment. Enter Mom and Pop: See the NYT article, Mixing Money and Family.

Jumbo rates are more expensive when buyers do qualify for them. Creative financing used to bridge the gap with second mortgages. Today, second mortgages are available up to $350,000, but only at a total loan to value ratio of 70%. This means a minimum of 30% down. These are equity line second mortgages with current rates from 4.75-5.5%.

Many clients looking to purchase larger homes do have assets. Often they already own a home with existing equity. This equity had been tapped in the past during a home purchase, based on an assumed rental value of the property. Now, in order to qualify without carrying the debt of both residences; Borrowers must retain 30% equity in the current house. They must have a signed rental agreement as proof of the rental value. They must have rental deposit verification. And they must show six months of PITI in reserves required on the current residence. Given these new restrictions, we may see more sale of house contingencies in our future. More likely, home buyers may be forced into an already bloated rental market as they seek to liquidate the equity from one property (selling first) as they strive to purchase their next home in a still competitive market. Beyond the financial stresses this often adds the stress of a second move.

Thanks to Ted and Tom from MPR Financial for helping sort out the details.

Appraising the Current Market Situation

by Arlene Baxter

Today our Berkeley Association of Realtors auditorium was packed to capacity with Realtors wanting to get the latest information on the status of loan availability and appraisal conditions in this changing market. Our speakers, one representative each from the mortgage and appraisal industries, confirmed what we’d been hearing anecdotally from our colleagues. Loans were super abundant a year ago, with everyone knowing someone moonlighting as a loan broker who could get you “such a deal!” Last summer came the implosion of sub-prime lending and the virtual disappearance of jumbo loan products, those loans larger than $417K. Fast forward to our current state. The pendulum has swung so far that now folks with a fully documented loan application may have great difficulty getting financing if they have less than 20% down, gorgeous credit scores, and substantial assets. Buyers who can stay within the limit of a $417K loan can still get very attractive rates, today at the 5.5% level. But buyers who need to borrow amounts up to the new “super-conforming” limit of $729,750 need to be prepared for much stiffer requirements (see FHA and Freddie Mac Daddy from March 6th, below).

One of the elements of loan approval that has been mostly in the background up until now is the appraisal process. In our area we have for more than a decade been able to assume that homes would appraise for their contract value, except in the rarest of circumstances. If a property had multiple offers, as so many did, that was a strong argument in determining that market forces were setting value, and that we were in an area of increasing values. Lenders allowed appraisers to use closed sales back as far as six months, and there was reasonable flexibility to use properties that shared a similar characteristic to the subject property, even if they weren’t in the same neighborhood.

The job of the appraiser has changed dramatically over the past few months. Marian Huntoon, the owner of Real Valuation in Berkeley, spoke to our Association today about the intensity of scrutiny that appraisers must now face. Lenders want to see properties used as comparables that sold within three months or less, and they insist on having both an active and a pending sale in the same neighborhood. Appraisers are now routinely making significant adjustments to value in order to use “comparable” properties that are really not very comparable at all. Marian estimated that it takes appraisers anywhere from twice as long to four times as long as a year ago to complete an appraisal report that is acceptable to the lender. Appraisal reports are now routinely sent back to appraisers with the request that additional adjustments be made to reflect declining market conditions. That is really a loaded phrase. Lenders are now reviewing market conditions with an extremely broad brush, defining the direction of the market by county, not by city, nor by neighborhood. Those of us who are actively representing clients in this area know that we are still seeing multiple offers on many properties in the most desirable neighborhoods. We are back to seeing pre-emptive offers both in the modest and in the most expensive price ranges. So to have both Alameda and Contra Costa Counties defined as a whole as “declining market conditions” makes us all a bit crazy. Explain that to my buyer who lost out in fairly modest competition of only four offers. He still didn’t get the house he loved! And then there was the James house, receiving 17 offers last week after only one Sunday open house (see our March 14th entry below).


But it is also true that there are properties sitting for a few weeks before they sell, as opposed to selling according to a pre-established seven or ten-day schedule. And then, even in some of our most desirable neighborhoods, there are the short sales, trust sales and foreclosures. Those are topics for another day!


Tip for Home Sellers: Review carefully with your listing agent what the recent sales have been, closest to your home both in location and style. Try to step back and look at the data the way both buyers and appraisers will now be forced to look: at currently active homes, those recently pending, and the sales back only a very few months. Even if some buyers might be willing to offer a very high price, unless they have unusually high cash reserves to make up the difference, most buyers will need to have your home appraise very close to their offer, in order for the contract to close. Sellers should come to expect to see both financing and appraisal contingencies in the majority of offers, rather than assuming that buyers will waive those contingencies in order to have their offer accepted. The goal is not receiving and accepting a very high offer. The goal is, and really always has been, to close the escrow, and at an acceptable price.

FHA and Freddie Mac Daddy

The new FHA and Fannie Mae- Freddie Mac conforming loan limits have been released by the U.S. Department of Housing and Urban Development. Alameda and Contra Costa Counties qualify for the maximum calculation of $729,750. (to see the National list of HUD-Determined Single Family Loan Limits click here.)

"We expect the impact of these loan limit increases on the housing market to be significant because of the infusion of capital into the mortgage market, which should result in lower interest rates across the board. In addition, there will be a direct impact on high-cost areas that previously required borrowers to take out costlier jumbo mortgages."-- Dick Gaylord, National Association of Realtors 2008 President

The true impact of these "temporary" increases mandated by the Economic Stimulus Act remains to be seen. In the meantime, I spoke with Ted Maniatis at MPR Financial for the tips on what it takes to get a home loan. Having a qualified mortgage broker look at your individual situation remains vitally important. There are lots of shades of gray as lenders look for new ways to scrutinize what you provide in black and white.

To paint a broad stroke, based on my conversation with Ted: Buyers seeking a conforming loan with at least 20% down (verified with two months of bank statements), a good job (with full documentation including one month of pay stubs, 2 years W2s; self-employed individuals need the last two years of tax returns) and good credit (at least 680) still have lots of options. Even so, a home buyer's budget should take into consideration fluctuations in interest rates.

There are noteworthy exceptions to the rules. For instance, a self-employed buyer may harbor tax returns that show unnatural downturns in income levels (true for me during my baby making years.) If said buyer has 30% down and a 700 or better credit score he/she may only need a statement letter of income to qualify for a loan (instead of submitting the full tax returns.) Sizable down payment and good credit scores can offset the need for full documentation. Down payment money may include a gift from family, provided they are willing to sign off that they do not expect repayment. (Mom, dad, are you listening?) If you are at all unsure, talk to a lender. Often there are creative solutions to the restrictive guidelines.

Beyond the loan application, there is the purchase contract. When negotiating to purchase a home from a seller, make certain to include adequate time lines. Allow for at least thirty days to close escrow. In the recent past, lenders had been performing within twenty-one days. Now, increased scrutiny often means more eyes on the loan package and a longer process. Appraisals also take more time and a contract should allow for at least ten to fourteen day loan/appraisal contingencies. Some lenders are using an Automated Valuation Model (AVM) , a bit like Zillow, to help satisfy their investors. In the past, if a reputable appraiser gave a property the thumbs up, you could be reasonably assured that the bank would approve of the loan amount. Now banks may routinely order an AVM. This automated valuation may conflict with the home appraiser's valuation. Such a conflict may necessitate a bank ordered appraisal review, and/or the bank may request one or two additional comparable recent home sales. An appraisal contingency can help protect a buyer through this process.

Maintaining adequate time lines and including appropriate contingencies can also buffer against the volatility of interest rates. Fluctuating rates can affect a buyer's ability to qualify for the requested loan amount. Contingencies can allow buyers the time to confirm and lock rates.

Tip for home sellers: Contingencies and contractual terms are negotiable. Your Realtor should be able to walk you through the contract from a risk versus benefit standpoint. Verifying down payment and the credit-worthiness of your buyer is an important part of this analysis. A strong financial possition may be worth considering, possibly even over a competing buyer's higher offering price. Many negotiating points in an offer clarify who will take on a given risk. In some competitive situations, strong buyers may be willing to forgo financing contingencies (therefore absorbing the risks) for the benefit of being favorably considered for the purchase. It is worthwhile to examine the buyer's credentials, regardless of contractual contingencies, in order to assess the buyer's ability to perform and thus complete the transaction.