Homeowner Affordability and Stability Plan

From the National Association of Realtors

On February 18, 2009, President Obama announced his Homeowner Affordability and Stability Plan, designed to help up to 7-9 million families avoid foreclosure by restructuring or refinancing their mortgages. In doing so, the plan not only helps responsible homeowners behind on their payments or at risk of defaulting, but prevents neighborhoods and communities from being pulled over the edge too, as defaults and foreclosures contribute to falling home values, failing local businesses, and lost jobs.

The key components of the plan are:

1. Government Sponsored Enterprises (GSEs) Refinancing for Up to 4 to 5 Million Responsible Homeowners with GSE loans to Make Their Mortgages More Affordable

2. A $75 Billion Homeowner Stability Initiative to Reach Up to 3 to 4 Million At-Risk Homeowners

3. Supporting Low Mortgage Rates By Strengthening Confidence in Fannie Mae and Freddie Mac

Download NAR's Summary on the Homeowner Affordability and Stability Plan> (PDF: 100K)
Chart: The New Housing Plan> (The New York Times, Feb. 18, 2009)

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.

What Buyers Should Expect from a Real Estate Agent

Buying a home is a very personal decision and you need to feel confident that your best interests are at heart. Here is what you should expect of your Realtor:

1. Preview homes. You can communicate what you want from a logical standpoint, but your agent should also see homes with you to find out what appeals to you on a visceral level. Then, he/she should be willing to do some of the leg work for you by previewing homes on Broker’s tour.

2. Educate. Beyond looking at houses, spending some “face-to-face” time learning about the market and the process is important. Our market is very unique and there is often a bell curve with new buyers. Some savvy buyers get their offer accepted on the first home that interests them. Other buyers need to write a few offers to understand our market, particularly if there is competition in their chosen area and price range. A good agent can shorten this learning curve and help you feel ready for that first house.

3. Navigate new financing options. With more banks pulling out of the wholesale market, it often makes sense to look for loans in more places. Your Realtor can help navigate the waters. Appraisals have also become a bigger issue than they have been in the past. Now the pendulum has swung so far north that houses we know to have solid value fail to appraise. If there isn’t a good comparable within ¼ mile and within the last three months (as is often the case with our inventory) the appraiser may have a problem. Your Realtor needs to know what is happening in the lending market and what the potential pitfalls are. It may make sense in some instances to have the loan/appraisal contingency run for the entire length of the transaction.

4. Know the local jurisdiction. There is a pile of paperwork involved in buying a home. Some is standard for all of California. Some ordinances are specific to each city. For instance, Berkeley has a Residential Energy Conservation Ordinance (RECO), a sewer lateral ordinance, rent control and a seismic rebate program. You need an agent who is knowledgeable in the area want to purchase in to make sure none of this is overlooked.

5. Know the land. Are there issues/concerns that are specific to the home's topographical location? Is it in an area with known soils issues? Is it built over/near a culverted creek?

6. Know the housing stock. There are also potential issues specific to our older housing stock. Could there be a buried oil tank from an old heating system? Were the proper permits taken out and finalized for any improvements? Are there any hazardous materials present such as asbestos? Can the old foundation accept bolts for seismic retrofitting?

7. Negotiate the best price and terms. With good negotiating skills you can get a better price for the house. By knowing what to look for in inspections, a good agent can limit future surprises and mitigate the expense by negotiating for repairs during the transaction.

8. Manage a smooth transaction. When your offer is accepted your agent guides the transaction to closing and coordinates inspections, manages the escrow, and maintains the time-line.

9. After sale follow-up. Most good agents are available after escrow closes for advice and resources.

In short, it is a complicated process. You are best represented by a diligent, accessible, knowledgeable agent. This is the biggest purchase most people will make in their lives and you should search to find the best representation. A good agent can buy you peace of mind.

NPR: The Giant Pool of Money

I'm a sucker for episodes of This American Life. No matter what the subject, the program always seems to lure me in with its combination of sentimental narration and poignant documentary. Episode 355 isn't merely entertaining, it manages to educate and encapsulate this whole economic/mortgage crisis. I recommend it to anyone interested in how we got here.

Here are the program notes:

355: The Giant Pool of Money (click here to be directed to the site, then click on the full episode link on the left.)

A special program about the housing crisis produced in a special collaboration with NPR news. We explain it all to you. What does the housing crisis have to do with the turmoil on Wall street? Why did banks make half-million dollar loans to people without jobs or income? And why is everyone talking so much about the 1930s? It all comes back to the Giant Pool of Money.

A shorter companion version of this story appeared on NPR's "All Things Considered."

Prologue.

Ira talks with NPR business and economics correspondent about two gatherings he attended. One at the Ritz Carlton and one at a community college in Brooklyn. The first was an awards dinner for finance professionals who created the mortgage based financial instruments that nearly brought down the global economic system. The other was a non-profit conference for people facing foreclosure. Ira explains that today's show lays out how the finance guys and the people facing foreclosure are connected by a chain of middlemen, and that together, they all brought about the current housing and credit crisis. (4 minutes)

Act One.

This American Life producer Alex Blumberg teams up with NPR's Adam Davidson for the entire hour to tell the story - the surprisingly entertaining story - of how the US got itself into a housing crisis. They talk to people who were actually working in the housing, banking, finance and mortgage industries, about what they thought during the boom times, and why the bust happened. And they explain that a lot of it has to do with the giant global pool of money. (31 minutes)

Song: "Hard Times," The Sex-o-Rama Soundtrack


Act Two.

Alex and Adam's story continues. (23 minutes)

Song: "Time Machine," Grand Funk Railroad

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.