While we are kicking around that affordability thing, let’s note that by the traditional measuring of the Housing Affordability Index that we are still better than the last peak.
The San Diego index got down to 8 in 2005, and today we are at 27:
But that is using today’s San Diego County’s median sales price of $485,040, for which it takes an income of $99,670 to qualify for an 80% LTV mortgage.
Have you seen many houses around NSDCC selling for $485,000? Me neither. In the last 60 days there have been 403 NSDCC detached-home sales closed, and only three of those were under $485,000!
The NSDCC median sales price for the last 60 days? $1,010,000.
In the same stretch last year we sold 500 houses, median SP = $837,243 with mortgage rates in the low 3s.
Income needed to qualify for 80% LTV mortgage:
2012: $126,500
2013: $175,000
Logically, this affordability issue should start to matter at some point. Could we run out of buyers? There have been 1,425 houses sold this year over $1,000,000 between La Jolla and Carlsbad!
The Trulia predictions earlier this week included several references to less investor activity in 2014, due to higher prices. In particular was his #2 point:
2) The Home-Buying Process Gets Less Frenzied. Home buyers who can afford to buy won’t be as frantic as buyers in 2013. That’s because there will be more inventory to choose from, less competition from investors, and somewhat looser mortgage credit in 2014.
Investor activity is less than what the media will have you believe – at least in San Diego. According to this article by the Fed, investors made up less than 4% of total sales in San Diego in 2012. Flippers came on strong this year, so the 2013 investor count is likely to be higher than last year’s, but probably still under 10% of the overall market.
I don’t think investors are done.
They will only quit when they’ve been burned – and it will probably take a few big losses to run them out of the business.
Instead, I think we will see increased competition for the deals – the standard listings that are priced at the comps or under. There should be a solid floor to the market.
But investors/flippers will be under increased pressure to pay more than they are comfortable paying – everyone is!
They will try to pass it on to the retail buyer, and bump their list prices even higher. Because of their confidence from recent successes, they will main contributors to the OPT pool (over-priced turkeys).
It’s already happening – there are flippers sitting on OPTs everywhere, confident that once the holidays are done, the buyers will be back.
However, the market has been extremely active the last couple of months – there hasn’t been much of a holiday dip in buyer interest, there just aren’t many quality homes for sale at decent prices.
Coming off a boisterious 4Q12 and fueled by mortgage rates in the low-to-mid 3% range, the spring selling season went gangbusters this year.
But now that the hyper-frenzy is done, buyers aren’t jumping at everything any more.
The current environment is much more cautious, which is ideal for a standoff. With (over) confident flippers continuing to push their list prices, and regular sellers tacking on an extra 5% to 10% just to make sure they get all their money, we are ripe for the Big Stall in spring.
P.S. Trulia’s other comment about ‘somewhat looser mortgage credit in 2014’ is suspect too. We haven’t covered the QM yet, but back-end ratios will be limited to 43% starting January 1st – and they have been as high as 50% this year.
Talking heads discussing the impact of higher rates – one being more ARMs:
The guest commentator said that we will lose 20% of the buyers if rates go over 5%, which sounded like a guess. We don’t have to lose any buyers if they were just willing to look at smaller homes or a cheaper area. It’s the buyer psychology and ego that will cause people to drop out.
This is a big shift in underwriting policy – from thelatimes.com:
Here’s a heads-up for the growing ranks of seniors whose post-retirement monthly incomes aren’t sufficient to qualify for a mortgage under today’s tough underwriting standards: Thanks to a rule change by the largest players in the home loan business, you may be able to use imputed income from your 401(k), IRA and other retirement assets to qualify for the loan you want.
That, in turn, could open the door to a money-saving refinancing to a lower-rate loan or a downsizing purchase of a new house or condo.
Top credit officials at Freddie Mac, the giant federally controlled mortgage investment company, said recently that a little-known policy revision now allows seniors and others to use certain retirement account balances to supplement their incomes for underwriting purposes without actually tapping those balances or drawing down cash.
Some excerpts from thelatimes.com – thanks daytrip!
Michele and Russell Poland’s credit was shot, but they managed to buy their suburban dream home anyway.
After a business bankruptcy and a home foreclosure, they turned to a rare option in this era of tightfisted banking — a subprime loan.
The Polands paid nearly $10,000 in upfront fees for the privilege of securing a mortgage at 10.9% interest. And they had to raid their retirement account for a 35% down payment.
Most borrowers would balk at such stiff terms. But with prices rising, the Polands wanted to snag a four-bedroom home in Temecula near top-rated schools for their 5-year-old son. By later this year, they figure, they’ll be able to refinance into a standard loan.
“The mortgage is a bridge loan,” said Russ Poland, now working as an insurance investigator. “It was expensive, but we think it’s worth it.”
In the aftermath of the housing crash, there’s no shortage of Americans who, like the Polands, are eager to rebuild their shattered finances. In response, lenders are emerging to offer the classic subprime trade-off: high-priced loans for high-risk customers.
Today’s high-risk lenders differ from those during the housing boom in key ways. These lenders say the new subprime mortgages are actually old school — the kind of loans made in the 1980s and 1990s. In other words, a borrower’s collateral matters, down payments matter, income and ability to pay matter.
Among those hoping to reverse the trend is the Polands’ lender, Citadel Servicing Corp. of Orange County. Chief Executive Daniel L. Perl said he has tested the water by making a few dozen subprime loans since late 2011, mostly with his own money rather than investment capital.
The Polands, among the first to receive Citadel loans, are part of a success story, Perl said. None of the loans has gone bad; about a third have already been paid off. With that track record, Perl recently raised $200 million from private investors. He’s hiring 55 employees to help him make loans through mortgage brokers across most of the West, and he’s moving from Citadel’s Aliso Viejo location to larger offices in Irvine.
“We’re looking to build it up over the next 24 months to $30 million to $50 million a month,” Perl said. “It’s a decent business plan in a credit-barren world.”
Perl requires 25% to 40% down, depending on credit scores that can drop as low as 500 on an 850-point scale. His potential customers, who pay a minimum of 7.95% interest, include higher-income as well as lower-income borrowers.
“Quite a few” affluent borrowers are good credit risks, Perl said, even though they had recent short sales — they sold homes for less than they owed on their mortgages. Perl also writes mortgages that exceed the Fannie Mae and Freddie Mac threshold for conventional loans, which varies but tops out at $625,500 in the most expensive areas.
“They come from all walks of life — doctors and lawyers as well as blue-collar workers,” Perl said. “As long as they have the ability to pay and equity in their homes, they are a candidate for one of our loans.”
John C. Williams, president of the Federal Reserve Bank of San Francisco, sees no reason that subprime mortgage bonds can’t reemerge in “plain vanilla” form, as opposed to the complex concoctions that ended up as “toxic assets” in the meltdown.
“I can’t understand why it hasn’t come back sooner,” he said, pointing out that there’s a strong market for bonds backed by subprime auto and credit-card loans.
“California has been famous for devising exotic mortgages,” Williams said. “But the reality is that they held up rather well until we started doing things like giving them to people with no jobs.”
As housing heads into the critical spring market, credit is finally beginning to thaw. Lenders are increasingly approving low-down-payment loans, and government-sponsored mortgage giant Fannie Mae is buying more of them.
It is a noticeable shift from the last four years, when 20 percent down on a home purchase loan was the only game in the neighborhood.
“In general lenders have been willing to do more than they may have been willing to do in the past,” said John Forlines, chief credit officer for Fannie Mae’s single family business. “Our requirements have not changed significantly, but other parties taking risk, the lenders and mortgage insurance companies in particular, have been more flexible than they may have been in the past.”
As the housing market improves, private mortgage insurers are starting to remove overlays on higher loan-to-value loans, meaning the percentage of the home value that is mortgaged. Low LTV’s and high credit scores were the rule recently for the private insurers, but that may now be loosening, making these loans cheaper than FHA.
“FHA is certainly becoming more expensive,” noted Craig Strent, CEO of Apex Home Loans in Bethesda, Maryland. “The increase in low down payments is reflective of first-time buyers coming off the sidelines and entering the market. We’re going to see more of this trend in the next couple of years as the economy improves and renters start to once again see the benefit of buying over renting. FHA has become more expensive and the mortgage insurance companies are the beneficiary of that, which is really not a bad thing as it means the private market is insuring the lower down payments rather than the government.”
The fiscal cliff deal also revived a provision that allows taxpayers to deduct their premiums for private mortgage insurance (which can run from $50 to $220 a month on a loan of $250,000). Most people know about the deduction for mortgage interest, but few have heard of the insurance deduction, says Rebecca Pavese, head of Palisades Hudson Financial Group’s tax practice.
Demand for new mortgages is finally revving up—among big spenders, anyway.
Home sales using a jumbo mortgage had year-over-year growth of 7.9% through September, compared with 2.7% for nonjumbo sales, according to an analysis for The Wall Street Journal by mortgage-technology company FNC.
It’s the latest sign that jumbo loans, defined as $417,000 and up in most places ($625,500 and up in high-cost areas), are boosting sales of luxury homes across the U.S.
Homes sold in major metro areas with a loan of $1 million or more were up almost 28% through September compared with the same period last year, the highest total since 2008, according to real-estate information company Dataquick. Similar sales with loans of less than $1 million rose 8.5%.
“There’s no question that the increased availability of jumbo loans is stimulating home purchases on the high end,” says Guy Cecala, publisher of Inside Mortgage Finance.
Home buyers and their brokers say jumbos make it possible to compete in coastal cities where the cost of entry can easily go north of $1 million. Behrooz Torkian, 39, and his wife, both physicians, landed a jumbo loan this summer after being turned down three times in prior years, allowing them to buy a three-bedroom cottage-style home in Los Angeles for $1.645 million with a 20% down payment. “We thought we would get a lot less house for what we had,” he said.
Dr. Torkian said offering a larger down payment helped this time around, but he also sensed that lenders were more receptive. The couple, who have two young children and are first-time buyers, got a 30-year fixed loan carrying a rate of 3.75%. “It came a little as a surprise that the loan was so easy to get approved,” he said.
While loans below the conforming threshold far outnumber jumbos, their rate of growth these days is slower. Here are some reasons why.
It’s definitely going to be a long drawn out process. The biggest group of new defaulters are FHA loans and since the government gets to decide foreclosure on those I expect to see many more years of free rent. FHA Foreclosures would come through HUD if there were any and as far as I know there’s virtually nothing coming out of HUD in San Diego.
It reminded me to include the changes in private mortgage insurance.
FHA now collects 1.75% up front (can be financed) and charges 1.25% of the loan amount for annual premiums (divided by 12 and added to monthly payment).
This has allowed the private mortgage insurance companies to modify their fee structure too. They have eliminated the monthly premium, and are collecting their entire fee upfront.
97% LTV = 3% premium up front.
95% LTV = 2.18% premium up front.
The buyers hope that they can find a seller who will pay the fee, and that way they dodge PMI altogether, unless they have to raise the purchase price to compensate.
The debt-to-income ratios are fairly strict, around 41%, and FICO scores need to be around 720-740. There are some cases where buyers with lower FICO scores can qualify too.
It makes the higher FHA loan amounts very unattractive, which could save taxpayers some money down the road. On a $500,000 FHA loan, the MI is $520/month, and with PMI it’s zero monthly.
The private mortgage insurance is for loans up to $546,250, the Fannie/Freddie high-balance limit here. The FHA loan limit is still $697,500 in San Diego.
An executive at one of the big PMI companies told me that they are looking favorably at the California market too, so hopefully these programs will stick around – and maybe get better?
Preparing for the return of the jumbo lending market and the days when Fannie Mae and Freddie Mac are no longer mortgage finance behemoths, Rancho Financial is bringing to market loans often blamed for the destruction of the nation’s housing economy.
A division of Calabasas, Calif.-based Skyline Financial, Rancho only six weeks ago began originating stated-income loans — when a borrower’s personal income is not verified. Rancho is currently processing about 100 applications with an average request of $500,000. The company is receiving 10 calls a day for a stated income program that has a $1.5 million loan limit and requires loans above $1 million to have a second appraisal.
Borrowers’ bank statements are examined, but not their tax returns or pay stubs. And unlike earlier versions of stated-income mortgages to high-risk borrowers, the Rancho product is only for the affluent homeowner.
“In the late 1990s and 2000s, no one was regulating anything and you had these loans that were made and sold on Wall Street, and they became known as ‘liar loans,'” says Rancho mortgage banker Craig Brock.”We’re staying clear of that. If someone has several hundred thousand in assets, chances are they do have the money. We’re trying to target smart people who have financial advisers, who have certified public accountants.”
But the concern that this product will again be abused permeates the mortgage-lending arena. “Yes, they can be abused, but that doesn’t mean the potential for abuse mean they should be taken out of the market place for everyone. That doesn’t seem to be an appropriate response,” says Rich Andreano, a partner at the Washington, D.C., law firm Ballard Spahr.
Most of the loans, Brock says, will go to individuals with a loan-to-value ration of 65% to 70% who put down 30% and a credit score of at least 740. A borrower must have a 2-year history of self-employment, a 12-month reserve and a CPA letter or business license.
“If we’ve got all those things, then the chances are pretty darn high that they have the ability to repay,” Brock says. “They won’t walk away from a 30% down payment.”
The generation of this program is unique considering the tremendous amount of uncertainty surrounding the finalization of the Dodd-Frank Act, which is making financial institutions hesitant to inject capital into the jumbo mortgage lending space.
“There’s no financing,” Christopher Whalen, a senior managing director at Tangent Capital Partners, said in early April. “In the New York area there is no financing available above $1 million dollars.”
But Brock views the program as a catalyst to drive the jumbo market and reinvigorate the secondary mortgage-finance market.
“We’re like a lot of companies nationwide. The reason why we’re bringing programs like this out is because we’re preparing for the day that Fannie Mae and Freddie Mac don’t exist,” Brock says.
“We have a hell of a conundrum right now because not only are we having to prepare now for Fannie and Freddie to not exist, but we’re having to create a whole new conduit for these jumbo loans. It’s a heck of a grind,” says Brock, who cites plunging property values and the Dodd Frank Act as challenges to the resurgence of the non-agency market.
Rancho won’t hold the stated income loans on its books. Instead, it sells them to a single portfolio investor (a confidentiality agreement prevents Brock from identifying the investor) who apparently is more comfortable buying these types of loans than the rest of the market.
“They found an investor. Well, they’re lucky,” says Andreano, remarking on the loan program. “For the right investor there is a marketplace for it. If you find the lender to do this correctly, these are good products to have. They won’t be large in number, it’s just they won’t be standard. The typical investor’s only going want the mainstream vanilla-type loans.”
And Fannie Mae and Freddie Mac aren’t taking them. A spokesperson at Freddie said products with alternative stated income provisions were eliminated from the agency’s guide years ago.
“There’s only one source (taking the loans). Until (PIMCO founder) Bill Gross, until Goldman Sachs start purchasing these loans again, it’s going to be slim pickings. Until they start buying these things, we won’t see any huge volume,” says Brock, who projects originating $50 to $75 million in stated income loans in the programs first 12 months.
“We’re hopeful that the market’s turning,” he adds. “A lot of us are showing confidence. We could be out there grabbing the so-called low-hanging fruit, but we’re trying to show some foresight for when the market comes back and people are involved in buying higher-prices homes.”
Could gloomy popular assumptions about how tough it is to get approved for a mortgage be scaring away large numbers of qualified people?
You bet. Lenders and economists will tell you flat out: The lack of accurate information about the availability of loan programs designed to address special needs is discouraging far too many consumers from even considering an application, much less shopping around.
For example, what’s needed for an acceptable down payment? Is it 20%, 10%, less?
Yes, it’s less – and potentially a lot less if you qualify for the right program. The widespread erroneous assumption that banks require a minimum 20% for conventional loans may have arisen from heavy media coverage of a controversial proposal by federal agencies calling for borrowers to put down that much if they want to get the best interest rates and lowest fees.
If you have little or no cash to put down, there are multiple options: The Federal Housing Administration requires just 3.5% down on its insured mortgages. Other programs let you go to zero — even finance more than the price on the house when fees are rolled into the mortgage — provided you fit into an eligibility niche. If you qualify as a veteran or active member of the military, you can get a zero-down Veterans Affairs-guaranteed mortgage. Plus the VA allows your seller to pay your loan fees and closing costs provided that they don’t exceed 6% of the house price.
What about credit? Haven’t lenders been pushing up minimum FICO scores into the mid-700s and rejecting applications with lower scores outright? Not everywhere. Though most lenders doing FHA loans require 620 to 640 scores to get you in the door, a few of the biggest FHA originators, such as Quicken Loans, will accept scores down to 580. Bob Walters, Quicken’s chief economist, says underwriters scrutinize low FICO applications extra carefully but are seeing good to excellent performance from them: Not one has gone seriously delinquent this year.
And how about debt-to-income ratios? Aren’t they tighter than ever? Not really. Lenders say that when loan applications go through the “automated underwriting” systems used by Fannie, Freddie and FHA, borrowers with high total monthly debt levels of 45% to 55% of household income — well beyond the posted limits — frequently get approved if they have positive compensating information elsewhere in the application.
Bottom line: Don’t assume you can’t qualify for a mortgage in 2012. Talk to lenders and seek out loan products that offer flexibility where you need it. You just might be surprised.
