The More I Learn, The Less I know…..

As if things weren’t strange enough, the subscription service that brought you Monday Morning Coffee for the last few years ceased operations in June. Since then I have been musing as to what to do for the many subscribers that have enjoyed those weekly snippets of wisdom. A dear long time friend and client jarred me back to responsibility last week asking, “what happened to Monday Morning Coffee? Did you drop us from your list?” No. I’ve just been thinking about what to say, if anything, as a replacement.
In keeping with the turmoil surrounding us in today’s real estate market, and just about everything else in our lives:

But Noooooo…..

Last week HUD announced to it’s thousands of mortgage brokers across the country that a full 3% fee would apply to all loans, all borrowers. Well, that’s about the end of that. Thanks, Uncle Sam. Instead of the carrot we were anticipating, we get beaten with the stick. Bear in mind that the same thousands of mortgage brokers paid up to $7,000 each to become FHA certified lenders, all in anticipation of FHA loans providing the needed path out of a deep hole. Now it would appear that they flushed that $7k down the toilet. No one is going to want these loans. They are now absurdly expensive.

The More I Learn, The Less I Know.

Although I’ve been at this real estate game for over 25 years, including the down markets surrounding Desert Storm, the Dot Com Bust, and 9/11, this has to be one of the weirdest periods I’ve seen yet. Suffice it to say that I learned a lot from those down markets in terms of strategy, tenacity, and faith. What I did not learn is how badly our financial systems have been in need of repair. With each of the aforementioned downturns, band-aids were applied. Small fixes that were just enough to restore confidence in what were dilapidated systems. Have you ever used “stop leak” in a failed radiator? It might get you to the repair shop, but no further. When the band-aides have been applied to our financial systems, we thought all was well, and drove right on by the repair shop.

Folks, we’re facing a bit of a perfect storm. People want to buy houses, and people want to sell houses. The only impediment to transacting business is obtaining decent loan terms.
The one entity over which the Federal Government asserts complete control is Housing and Urban Development ["HUD"], which in turn is the administrator for Federally insure home loans ["FHA"]. Since raising the FHA loan limits to a level almost relevant to to day’s prices, in the past 6 weeks HUD has vascillated wildly as to how to charge borrowers. For weeks it was stated that the insurance premium cost would be based on risk assessment of individual borrowers. Makes sense. The driver that has 3 DUI’s pays more for auto insurance than the driver that’s never had a ticket. The borrower that has never paid their bills on time should pay more for their loan than someone that has never been late.
Next on the hotsheet of not-so-good news: FNMA and FHLC, because of their own problems, just announced that they are now going to charge lenders 0.5% for loans that they buy. It has been 0.25% since, well, forever. Of course this cost will be passed on to borrowers in the form of 1.25% origination fees instead of 1%. Or the APR will simply be higher in order to preserve the 1 point fee and still pass on the added cost. That should be a big help……..to no one. Fewer loans, less volume, slower recovery.

Why is it that lenders, when the easy money stops rolling in, assert draconian fees and costs on those that are still doing business? IndyMac Bank, the California based lender that failed last month, is a case in point. Inexplicably, IndyMac announced early this year that it is their policy, on all of the second mortgages they had made, that they would NOT allow subordination of their loans for the sake of homeowners attempting to refinance their FIRST mortgages. For those with toxic first mortgages, this left them no way out. They either had to sell, or walk away. In either case, when told by their lender that their refi was dead because IndyMac had effectively blocked the process, how long do you think it took for these borrowers to decide whether or not they would continue to send payments to IndyMac? As soon as I heard this I said, “dead bank walking”. Sure enough, it’s dead.

I keep visualizing these really bads decisions being made by a very few sweaty little men in windowless rooms. All they look at is printouts ananlyzing cash flow, and then they hit the panic button. They have no faith, and they have no vision. They’re hanging on so tight the blood doesn’t get to their brains. Who put them in charge? When busines is slow at a Seven-Eleven do they turn off the lights and beer cooler to save money. No. They cut prices to entice MORE buyers, get the volume up to compensate for lower margins, and keep prices low until things improve. If they turn off the lights and the beer cooler, they may as well lock the doors. Why don’t lenders, especially that which is run by the Feds, get it?

I suggest that we all start writing to our Federal representatives. Does yours have a clue as to what is at stake?

Not to get too political:

6 years ago, before the congrssional vote was taken on whether to attack Iraq, I wrote to Patti Murray and Maria Cantwell. While it was admittedly self serving at the time, I asserted that war [unabated ego], combined with tax cuts [shameless vote buying], could bring ruin to our financial markets. When the government starts borrowing money, it depletes the pool of cash available for everything else, and drives up interest rates. Well, here we are. Money is tight, and getting tighter. Banks are failing. People are losing their homes. All for lack of liquidity because the goverment is spending more than it takes in. And people are worried that a Democrat will raise taxes, spend more? If traditional politics are to be believed, then Bill Clinton was the best Republican President we’ve ever had.

The current goverment cash burn rate is unsustainable. It won’t matter who is in charge when the bill comes due. Tax cuts were a great idea to stimulate growth, as long as the thin ice held out. How about those recent tax rebates? Not even a blip on the radar. We can’t buy our way out of this mess. We are going to have to work harder/smarter, spend less, and pay taxes commensurate with the expenses incurred. Honestly, would the Iraq war have lasted 6 years if taxes had been increased each year to pay for it?

The More I learn, The Less I know. So teach me something.

Housing Predictions For King County and South Snohomish

Everywhere we go people ask us the same question, “how are things in real estate?” Depending on our energy level at that point in time, our answer might take 10 seconds, or 10 minutes. Sometimes people ask because they are truly interested from a personal standpoint. Sometimes it’s too find out if we are suffering as much as the media says we should be. Sometimes I think folks want to know what Kind of person I am i.e., will I simply throw out a lot of optimistic BS, or am I real and will actually think about how to honestly respond.

After much reflection on our position and experience in the current market, combined with discussions with other agents and brokers that I highly respect, I have come to the following conclusions:

1. There is a current oversupply of new homes. These homes will be discounted and sold by the builders over the next 6 to 10 months.

2. The same builders will generally not be allowed by their respective lenders to start new homes until their current completed standing inventory is sold off as stated in number “1″ above.

3. These same builders that used to get the green light from their lender(s) to start 10 homes at a time will be limited to 3 starts at a time for the foreseeable future. Successive home starts will be dictated by closed sales e.g., “you may start 3 now, but you have to finish and close one sale before you will be financed to start a 4th home.” It used to be that a builder could start a new home as soon as a buyer put down earnest money on an incomplete home (pre-sale). I don’t think it’s going to work like that any more, at least for some time.

4. Due to the foregoing, the supply of new homes will be consumed, and the rate of re-supply constricted, within 12 to 18 months.

5. Builders will have to work hard to keep their vacant lots looking like a happy place with fencing, landscaping, etc., and not looking like abandoned developments.

6. The change in new home supply will have a direct effect, albeit slightly delayed, on the resale home market. It will take 18 to 24 months for upward price pressures to reappear in the resale market, but it will come back……..just about the same time the mortgage industry will have healed from recent and current problems.

7. When asked the question, “how far will the market drop?”, my reply is November, 2006. Appreciation could be readily justified to that point, not beyond. Some folks maybe got a little more than they should have for their home in the first half of 2007, and some maybe paid a little more than they should have. But the difference is no more than will be readily absorbed and smoothed out over the next 5 years.

Thant’s my story and I’m sticking to it……at least for now.

Housing Pessimism: Get Over It….

I suppose it is not fair to ask today’s prospective home buyers what all the fuss is about. Given the daily onslaught of negative media coverage of housing and the economy, it is permissible to be concerned about whether or not to take the plunge. However, I don’t understand the hand-wringing, mind warping fear that has gripped many home shoppers to the extent that they can’t make a decision. Analysis paralysis is how I reference the condition wherein folks talk themselves out of making an offer as fast as they decided to buy. There is nothing wrong with being analytical about a home purchase, but the human factor cannot be dismissed.

A home is where babies are raised to be children, puppies become dogs, we celebrate Thanksgiving, birthdays, have barbecues with neighbors and friends, plant a garden, paint a room, start a hobby, read a book. All of these things can be done in an apartment or a rental home, but they are never the same as when they take place in your own home. There is not the same feeling of permanency, of family, when life takes place in a building owned by someone else. Yes, there is some stress and work involved. But I think you will find that most homeowners wouldn’t have it any other way.

It’s accepted that no one wants to be the buyer that bought at the top of the market. Conversely, often it is the fool that sets their sights on buying at the bottom.

Buyers have more choices today in the Puget Sound Region than they have had in 5 years. The whining, the crying, and moaning that went on for those 5 years while buyers had little to choose from stands in stark contrast to the attitudes of today’s buyers that seemingly can’t make up their mind about anything. Is it because they have too many choices? Perhaps. More likely it is because they lack focus. “What are the reasons for buying home now. What will change in the future that will impact my decision today?”

Interest rates may go up……or down.

Home prices may go down……..or up.

The days of buying and selling within 2 or 3 years are well behind us. If you’re not going to stay put for at least 5 years, don’t bother. That has been the traditional standard for over 50 years. Five years is enough to absorb the inevitable dip in value along the way and still achieve enough appreciation to cover the selling costs when it is time to move on.

So if you are worried about buying, get over it. Be smart, don’t overbuy, pay for a thorough inspection, know the costs of needed repairs, get a conservative loan, then move in and get on with your life’s business of growing memories.

The Mortgage Professor

Jack Guttentag, aka “The Mortgage Professor”, is  a syndicated columnist to the Seattle Times. He has often referenced his website: http://www.mtgprofessor.com/Default.htm. Today, I finally decided to pay a visit, as I am considering the alternatives available to me for refinancing my current Jumbo mortgage. There is a lot valuable information there. It is more important than ever to thoroughly research the loan process as lenders attempt to shore up cash flow based on fewer transactions. Learn about “UMB’s” and “MB’s” from the professor, then set your sights on what the best avenue is for you.

As Diana mentioned to me this morning, it is uncanny how acutely aware homeowners and home-buyers are aware of commissions paid to real estate agents, yet have little grasp of how mortgage lenders/brokers are compensated. This web site will open the eyes of would-be borrowers to the web of techniques utilized by unscrupulous lenders that seek to take advantage of borrowers, particularly when their backs are to the wall i.e., facing default on a purchase and sale agreement if they don’t close, or losing a home to foreclosure.

The lack of regulation and standardization is what created the mortgage lending crisis. It is solely up to consumers to decipher what they are getting for their money. This website will educate you to the pitfalls, give you the questions to ask your lender, and resources that you may not have considered. It takes a bit of effort to absorb, but is well worth the time invested………..for all of us. For if we, as a group, bring similar pressure to bear on the lending industry, we might just help straighten out the current crisis, as well as insure that it is not soon revisited.

Mortgage Mess: Light at the End of The Tunnel?

Jack Guttentag, aka “The Mortgage Professor”, provides some interesting insights into the mortgage market meltdown in his Sunday Seattle Times article “It’s Time To Expand Role of Mortgage Insurance”. Parts of his article are characteristically dry and difficult to read, but the essence of the message is there. If there is a bright spot in this deluge of not-so-good-news, it is that the mortgage insurance companies, those that impose an insurance policy on mortgage amounts in excess of 80% of property values, are doing OK. Why? Because they are insurance companies. As insurance companies, they have been required to “hold in reserve” i.e., save, a portion of the premiums that they collect in order to weather, without going broke, a housing downturn event. This means that they actually have the money to absorb the losses they are suffering through foreclosures and deflated property values. At least, so far.

Have you wondered how so many managed to get that zero down 100% no doc, no equity, no job loan with having to pay mortgage insurance premiums ["MIP"]? As an alternative, the mortgage bundling geniuses of Wall Street cooked up a risk assessment system that charged loan fees, interest rates and loan types based on risk factors.

“Oh, you don’t want to pay MIP with your loan every month? No problem. We have this little thing called an ARM with an artificially low start rate that is guaranteed to completely blow up your financial life in 2 or 3 years. But don’t worry, we’ll refinance you out of that in a year or so into a 30 year fixed rate loan you can live with. How do we do that? Simple! Your property simply has to appreciate to where it will appraise for 20% more than the inflated value that we are using today. Oh, did I say inflated? I meant enhanced. That’s what we say when we pack all of the exorbitant loan fees onto your loan amount. That way, you’re not just getting 100% financing, but about 103% financing. But don’t worry. The important thing is that you are in the market, and surely your property will continue to appreciate at 10-15% per year.”

The Mortgage Professor thinks that MIP is the way out of this mess. Once considered a nuisance to borrowers, it may now be a blessing as a means to refinance loans that exceed 80% of appraised property values and allow owners to keep their homes.

Rex Agreement: Avoid This Like The Plague

You would think that with the mortgage mess still unsorted, the last thing we would see is another exotic home equity product from a financial institution. The Rex Agreement has to be one of the most abusive instruments I can image. It’s just like taking your home equity to the pawn shop. According to the Sunday Seattle Times article:

1. If you have high equity in your home, and it is worth $500,000 you may borrow up to 15% of its value ($75,000)

2. You get the money immediately, free to do whatever you want with it, interest free.

3. You sell your home 5 years later for $700,000.

4. You are required to repay the original REX loan of $75,000 PLUS 1/2 of the appreciation, for a total of $175,000.

It cost $100,000 to borrow $75,000 for 5 years. Let’s think about that for a moment.

If you borrowed $75,000 with a HELOC (Home Equity Line of Credit) from Bank of America at 6% interest for five years, making 60 monthly interest only payments of $375, it would cost $22,500. Hmmmmmm……..$175,000 vs $22,500.

Make no mistake, this is a highly predatory product designed to tap into good folks’ fears. I can hear the “closers” for this one.

1. “You won’t have to sell your home, you can stay where you are.” [Note that these loans are only for people with high equity and excellent credit i.e., older folks that have been scared to death by the media over the last 6 months and think they should stuff their mattress with cash.]

2. “If your home goes down in value, we will share that loss with you.” ["Oh golly, what incredibly nice guys. How could they possibly be crooked if they are willing to accept half of the risk of my home depreciating?" Are you kidding? If they didn't know that the real estate markets across the country have already bottomed out, and are set for a steady march upward in appreciation, they never would offer this product.]

3. “You won’t pay one cent of interest for this loan.” [Gee, thanks! Over the past 30 years, single family home appreciation has averaged about 4% annually. 5 years would mean about 20% appreciation, and I only have to give you guys half? 10%? Where do I sign.]

4. “These are just standard forms.”[My favorite! Let me say this once. When it comes to lending, THERE ARE NO STANDARD FORMS!!! I think that this has been thoroughly demonstrated by the current record foreclosure rates by homeowners who thought they were signing "standard forms" when in fact they were endorsing a time bomb. If people had taken the time to read their loan docs, the entire mortgage/credit mess may have been averted.

If you know elderly homeowners who might be strapped for cash, probably so that they can pay their ridiculously high property taxes, or unforeseen medical bills, warn them against REX Agreements. It is better to explore the offerings of a bank bank based “reverse mortgage” than to succumb to the vultures that will be peddling REX Agreements. They are already advertising on the radio locally. Warn your elderly relatives and friends. They are the primary targets.

Know The Cost Of Your Commute

As we face the prospect of $4.00/gallon gas, and the likelihood that we will soon be paying tolls to drive around King County, take the time to calculate what your commute actually costs, relative to your home’s value and location. This nifty tool will answer questions that perhaps you hadn’t thought of asking before. While we have historically sought to reduce commutes to save TIME, it is going to become just as important, if not more so, to consider the hard costs associated with commutes.

This calculator is a little bit tricky to use at first, but patience will provide excellent information. You may input as many “commuters” from your family as you like, each with its own vehicle value and average miles-per-gallon, as well as distance, number of commutes per month, estimated vehicle maintenance costs, and toll costs. This information is combined with the size of respective mortgages, interest rate, and location. The results can be a bit startling, especially when you move farther out and spend MORE rather than less as we did a few years ago.

While it was understood that our mortgage would more than double in size, I never could have anticipated that the extra 10 mile commute expense would add another $1400/month.

Location. Location. Location……………

What $1 Million Buys In Homes Across The U.S. by Forbes.com

Honestly, most of the news surrounding housing has me a little depressed lately. Actually, it’s not so much the housing, but the credit debacle that has caused banks across the country to lose their collective minds as evidenced by arcane C.Y.A. policies implemented in the last week: cancelled “HELOC’s” [home equity line of credit], and second position lenders refusing to subordinate for the sake of refinancing a first [see Ken Harney's article from the Sunday Seattle Times]. So I thought it be nice to look on the lighter side of real estate this week. If you would like to see what $1,000,000 buys in other parts of the country, you will enjoy this article by Matt Woolsey at Forbes.com

Fed Help Not Really Enough For King County….

 Daniel Billett of Response Mortgage in Seattle plans to refinance as soon as the new loan limits are confirmed.

The Saturday Seattle Times featured a cover story by Katie Hafner of the New York Times concerning the Federal stimulus packagerecently signed into law. (For some reason, the Seattle Time’s on-line version is not available, so this link takes you to the NY Times site.) While the story reveals that the new maximum limits for “conforming” loans may be as high as $729,950, it also explains that the limits are set in accordance with regional median sales prices. That means that our new local conforming loan limit will be about $544,000. It will help, but not nearly enough for the many homeowners sitting on 3 to 7 year adjustable rate mortgages in excess of $600,000. And there are a lot of them. The King County market needed a boost in the conforming limit to at least $650,000 on order to avert a looming meltdown in what I call the “upper tween-er market”: homeowners that earn enough to support properties valued from $700,000 to $1M, but are not liquid enough to reduce i.e., pay down their respective loan amounts to get under the conforming limit and refinance before their current jumbo ARM resets or expires.

Builders face a similar problem. With finished building lots coming on line at between $225,000 and $350,000 each, builders generally need to build finished homes worth between $750,000 and $950,000. The new conforming loan limit of $544,000, by itself, is not going to be sufficient to finance this type of product.

Since it has taken sine June of ‘06 to get this much help from the Feds, waiting for additional, or increased, assistance isn’t going to be practical for many homeowners and builders. I think it is more likely that the higher jumbo loan (non-conforming) rates will have to be endured for the foreseeable future. With those rates exceeding conforming rates by 1-2%, and fewer buyers willing to pay those rates, there will be downward pressure on prices of properties in the upper tween-er market.

(Note: I refer to this price range as the tween-er market because owners and buyers in the market above $1.2M generally have enough liquidity that they are comparatively immune to interest rate variances on this scale.)

Where is the Economy Headed?

Ben Bernanke looked about as comfortable as Roger Clemens at a Congressional hearing on the economy yesterday. In case he didn’t know, all the help the Feds are talking about is HAPPENING TOO SLOW! The credit crisis is actually a crisis when banks won’t lend to banks, never mind to you and me. The credit crunch is real!

Be very careful with your credit and assets. Stories abound of home equity credit lines being cut off, or called in, because of minor credit score variances. All credit sources are monitoring credit score movement with a very sharp eye seeking to pinpoint any problem borrowers before they get into trouble. Unfortunately, the net is cast farther and wider than necessary, and many unsuspecting borrowers are getting cut off at the knees when they least expect it.