Even as the Sacramento real estate market’s lower price range turns frothy once again with first-time buyers and investors slugging it out over for bank foreclosures, the lending noose draws a little tighter.
The Pitfalls of Buying Auction Properties
A client called last week. She had purchased a home–a condo actually–at auction last November, and she got a great price. However, she was unable to arrange a loan because the condo was “non-warrantable”, a term that means the condo project didn’t meet Fannie/Freddie requirements. After paying late fees and penalties for failure to close on time, and not wanting to lose their deposit, she pulled money from their home on an equity line and paid cash for the condo.
Now she wants to refinance the condo and pull some of her cash back out. The trouble is, lenders have reinstituted “property seasoning” requirements and tightened up the cash-out rules. Fannie Mae and Freddie Mac now require 12 months “seasoning” before she can refinance and get any cash back out of that condo.
Moral of the Story
I hear frequent tales of all-cash buyers in the market. It makes sense. Some of these bank-owned properties are so trashed that banks won’t lend money on them. The only solution is to buy for cash, fix the place up, and then get the loan when the property is in decent shape.
Now, that game is over. I think lenders want to finance responsible investmentments, and they’re sick of “flippers” and people trying to make a quick buck. So, watch your step. And if buying for cash was going to be your strategy, plan to have your money tied up for a bit longer.
read comments (0)Sacramento Mortgage Rates: The Start of a Recovery?
I just received some statistics on the Sacramento County market that confirm what we in the Sacramento valley have been feeling: buyers have emerged like a dragonfly hatch and are swarming around a veritable feast of low-priced, bank-owned properties. Has Sacramento taken the worst of its lumps?
For April, new escrows rose 33%, and closed escrows skyrocketed by 35% from the previous month and 68% from the same time last year. But the number of new listings fell 30%, reducing the inventory level to 5.9 months from 8.3. To further underscore the market’s keen interest in foreclosures, 90% of April’s sales were under $400k, 85% under $350k. Activity is certainly on the rise. But how deep is the pool of buyers?
Is the Financial Crisis Over?
Lately, Wall Street murmurs suggest that the worst may be over for the financial crisis. This theory has found support in the March and April retail sales numbers. Sales, ex-auto, grew by 0.5% in April, faster that analysts’ expected, on the heels of a 0.4% gain in March. This week’s CPI figures will give further clues as to impending threat of inflation and whether the Fed will soon have to begin reversing the direction of interest rates.
However, there is a big question about whether the financial dislocation will disrupt employment, further reducing consumer spending at the same time that “import inflation” is redirecting consumer dollars from luxuries to necessities. Mohamed El-Erian from Pimco makes this point is his excellent article Why This Crisis Is Still Far From Finished.
As far as mortgage rates are concerned, don’t bet on lower rates any time soon. The “Treasury bubble” will certainly burst if investors begin to feel like the storm has passed. But if the economy gets worse, mortgage rates will remain high to keep MBS investors in the game. Keep your seatbelt fastened; it’s going to be a bumpy ride.
FHA Secure, Alonso Quixano, and Windmills
When FHA Secure was announced by the Bush Administration back in August of 2007, the FHA folks were perplexed. I know because I called them. First of all, FHA had already been doing unlimited CLTV refinances for a couple of years. Second, you didn’t have to be in default on your mortgage to qualify. And third, nobody had any idea what the hell the administration was talking about.
Those familiar with the Cervantes classic Don Quixote will remember Alonso Quixano, the county gentleman who descends into fantasy and reconstructs a farcical reality in which he fights unwinnable battles with imaginary enemies. The familiar phrase “tilting at windmills” has become iconic for the persistent pursuit of futile endeavors.
Still With Me?
Watching the administration and Alphonso Jackson of HUD descend into their own farcical reality has been disappointing. Like the great novel’s second half, the tale of FHA Secure appears to have evolved into a deliberate deception most painful to those for whom FHA Secure initially appeared to offer some hope.
Peter Berg, whose terrific watch dog blog FHA Mortgage Guide keeps close tabs on FHA financing, brings forth the disappointing reality of the statistics vs. the claims, as reported by HUD itself.
Despite the hundreds of thousands of homeowners Jackson claims to have helped (you will note that the these numbers are always in reference to FHA loans in general), “the glaring failure of the FHASecure program,” as Berg points out in his recent post FHA Mortgages at Mid-Year: Real Numbers Comes Out, is that “just 1,729 delinquent conventional borrowers have been helped in a period of six months.”
That’s a far cry from from the spin.
Sacramento Real Estate & Mortgage: A New Day
After 3 1/2 years of a real estate market in full retreat, affordable prices have once again sparked a frenzy of buying activity. Buyers are back. Some are first-time home owners previously sidelined by an overpriced market or frightened off by the free-fall in values. Some are investors who can now achieve a break-even cash flow while buying at the nadir.
Banks, heavily laden with foreclosures, are taking advantage of this turn of events by stoking the bidding fire with aggressively priced REO properties. It’s the eBay syndrome. Draw people in with low prices and let their emotions carry the price up. It works.
I am amazed too at the money that has emerged to take advantage of this. Reports of all-cash buyers (investors mainly) are frequent, and I have refinanced homes for clients, withdrawing enough cash to purchase investment property without financing restrictions. That is almost a necessity in cases where the property condition would preclude new financing.
So with prices bouncing off a hard floor and the sudden release of pent-up demand, the bottleneck seems to be with financing. Lenders are still reining in LTVs, raising credit score requirements, demanding repairs on rough properties, and generally behaving the way you or I would if we were worried about being able to sell these loans to investors.
Still, for those who can document income and good credit, there are still options. And a little down payment can do wonders. In fact, it’s a lot like it was a decade ago. And that makes pretty good sense.
Sacramento mortgage rates shot up to 6.24% this week from 5.5% during the week of January 24th, according to Freddie Mac’s weekly rate survey. Most people are still under the impression that the Fed adjusts mortgage rates or that mortgage rates move in lock step with Fed cuts. In recent weeks, Sacramento mortgage rates have done exactly the opposite. The market is a bit better this morning on news of flat consumer spending and lower consumer sentiment.
Nehemiah Gets The Cold Shoulder
I wrote about combining FHA + Nehemiah: a Path to 103% Financing a few weeks ago. It’s one of only a couple ways left to structure 100% financing. Several title insurance companies and at least one wholesale bank announced this week that they will disassociate themselves from deals where the Nehemiah program is being used. Nehemiah has survived numerous challenges in its non-profit status over the years, and it has another court test approaching. Are these companies are putting some distance between themselves and what will be hind-sighted as yet another contributor to the meltdown?
New Conforming Loan Limits
As the deadline approaches for HUD’s assessment of median prices, hopes fade for any meaningful increase in Sacramento conforming loan limits. According to my sources, Sacramento will be designated as a “high cost” area, but with median prices somewhere in the low $300k range, the formula may yield only a small increase, if any. Higher limits could unlock S.F. Bay Area markets and send more relocations our way to absorb inventory in the upper prices range.
Okay, time to get back on track. I am still recovering from the hacking that took down Lending Clarity and many other Tomato blogs. More than that, I’ve just been extremely busy pre-qualifying home buyers. Prices in many areas of the Sacramento real estate market have bounced off a hard floor and pent-up demand has buyers fighting it out once again over well-priced properties, often bidding prices up in the process.
Meanwhile, mortgage rates have been locked in a narrow range since the beginning of the year. Freddie Mac’s Complication of Weekly Survey releases for 2008 shows this well. For most of this year, rates have stayed within a whisper of 6%. The weekly average belies the incredible daily volatility we have experienced.
The Treasury Bubble
With corporate earnings reporting the past couple of weeks, things looked bad. It’s just that they weren’t as bad as everyone expected, so that made them look good, well, in a relative sort of way. And despite a plunge in consumer confidence to the lowest level in 26 years, the last round of corporate write-downs have caused a lot of economists and Wall Street pundits to wonder whether the worst is over.
If it is, and if the investors who fled to the safety of bonds, especially Treasuries, sell off suddenly, expect interest rates to rise. Expectations for another 50 basis point Fed cut next week have already evaporated, and even hopes for 25 basis points are fading. With renewed inflation concerns on the table, higher mortgage rates could be just around the corner. That would not be a big help right now as we struggle back to our feet.
Real estate buying activity in Sacramento is highly concentrated in the foreclosure sector. Makes sense. Buyers want the best deal they can get, and bank-owned properties appear to offer the best chance for that. But financing those REOs isn’t always easy, especially as shrinking bank liquidity pulls the lending noose tighter.
The Problem with “As Is” Sales
Many bank owned properties have been abused or poorly maintained. The banks who now own them would prefer to sell “as is” to avoid throwing good money after bad. But you can bet those same banks wouldn’t finance those homes now if asked. Prices are even lower if the bank hasn’t had to spend money on fix-up, but securing a loan on a roughed-up property is a growing challenge
Traditionally, lenders are concerned with two categories of repairs: habitability and health & safety issues. Conditions that impair habitability include kitchens lacking appliances or cabinets, non-functional sink or toilet fixtures, damaged or removed flooring, or a leaky roof. Health & safety issues are self explanatory but can include even minor items like missing electrical outlet covers. Banks have always required that these items be repaired prior to close. But it’s getting tougher as banks balance sheets dry up, leaving them extremely vulnerable if they originate a loan that cannot be sold off immediately in the secondary market.
A Few Possible Solutions
Here are a few ways to deal with this challenge.