California Dreamin’/Burnin’

We set out for the Los Angeles area last week to get a little first hand knowledge from local real estate agents on the state of their market. I was fortunate enough to meet Denine Kerns, CRS of Prudential California located at Corona del Mar, a toney oceanside community about 40 minutes South of L.A. Denine specializes in estate properties and is a member of the Prudential President’s Circle. When asked the difference in  volume over the last year Denine said they were down about 40%. (Not bad considering their average listing is about $1.5M) Her location and quality of clientele have somewhat insulated her business from the woes that afflict newer, outlying communities, but it is still much slower than usual. As we talked it was apparent that there are more similarities than differences between our markets. The greatest challenge is the unpredictable mortgage market. As in King County, Denine has seen deals flip due to financing more than any other cause.

When you hear of sales failing due to financing on highere priced properties, it is rarely because of anything that the buyer did, or did not do. It is rarely the fault of the mortage broker or loan officer either. Deals are getting kicked out by underlying lenders, the companies that actually supply the money, then sell the loan to the secondary market. It is hard to know where the sticking points are, but mortgage brokers tell me of loan programs that are presented to them on-line in the morning, and are gone by the same afternoon. Borrowers may get approved for a certain loan and terms, but have no guarantee that the loan they are approved for will stick around. Even with a “lock” on the interest rate I’ve heard of lenders pulling the program to the dismay of brokers and borrowers alike. Denine concurs that basic jumbo loans are the staple of her business and will be a bumpy ride until some uniformity for large loans emerges.

Just as the increased “conforming” loan limit in King County is a bit of a laugher at $529,000, the $729,000 loan limit for Denine’s market is not much help either.

This is a NASA photo dated October 25, 2007. Ironically, this is about the time recent home buyers near the burn areas realized their mortgages were also catching fire and burning up their cash flow beyond their means. This is toxic loan central. During 2004 through 2006 home builders armed their respective sites with agressive sales agents, and even more agressive loan representatives. Homes priced from $450,000 to $750,000 were snatched up by buyers with little or no credit, or down payment. Any wonder there is a problem? These are the walk-away buyers that never had enough skin in the game to begin with. They knew little about what they were buying, or why they were able to pull it off. If it sounds too good to be true………

Who knew something so good could go so bad, so fast? In their hearts, the buyers knew it. The people that put together the loans never doubted it would go bad. Their mission was to do as many deals as humanly possible before it tipped over. Appraisers and underwriters were caught up in the flow i.e., the quality of the deals took a back seat to the quantity. Big lenders like WaMu had been delusional for too long to rein in the frenzy. They feared being left out.

There are some ideas being discussed right now in Congress. Jack Guttentag, aka The Mortgage Professor wrote an insightful article in Sunday’s Seattle Times. He is concerned that government intervention at this point in the game will further gum up the works and further delay the healing process.