Proposed new mortgage finance rules

You may have seen reports that the federal government is proposing new mortgage finance rules under which only home purchasers who can afford a minimum 20% down payment on a conventional loan would get a shot at the best interest rates and terms. It's true and here are the new guidelines:

Strict mandatory debt-to-income limits. Under the proposal, to get the best mortgage rates, you
would need to spend no more than 28% of your gross monthly income on housing-related expenses, and you couldn't have a total monthly household debt that exceeds 36% of your income. There would be no flexibility to go beyond these ceilings, unlike in today's marketplace in which Fannie Mae and Freddie Mac consider debt-to-income ratios along with other factors through their electronic underwriting systems. At the moment, Freddie Mac has an overall debt ratio limit of 45% of an applicant's stable monthly income.

To refinance your existing mortgage and replace it with one carrying the best interest rate, you'd need no less than a 25% equity stake in your house to qualify. If you sought to take any additional cash through a refinance, you would need 30% equity. Today's requirements are usually not as strict.

Pristine credit standards. For example, if you were 60 days late on any credit account during the previous 24 months, you would be ineligible for a mortgage at the best terms.
These proposals were released at the end of March by banking, securities, and housing regulators, along with the Department of Housing and Urban Development. The agencies were required by the 2010 financial reform legislation to come up with new standards for low-risk conventional mortgages. Under the law, loans that do not meet these strict tests will be pushed into a less-favored, higher-cost category. Banks would need to set aside 5% of loan balances in reserves to cover possible losses from defaults. This extra capital cost would inevitably be passed on to consumers.

While markets like Palo Alto can bear price increases, multiple offers, and a healthy pace of sales, there are several other markets throughout the Bay Area that cannot. In real estate, it is all relative. Each sale needs just one seller and one buyer.

The value is determined by who is selling, the profile and capability of the buyer, the support of the lender, the type of real estate you are buying or selling, inventory, days on the market of the competition, list / sales price of past sales, and whether you are in a negotiating situation or a competitive world fighting against all cash multiple offers. The key to navigating all of this is education. You need to know what market you are selling or buying in and what will it take to get the house sold or to buy one. The rules are not only different in different areas, but they can also change daily based on what is selling and at what price point. Additionally, the media confuses us even more. ZIllow will tell us that home prices fell 3% in the first quarter, the steepest decline since 2008, and Fiserv Inc. is predicting home values still have 5-10% more to decline. Yet, this is not what homebuyers who are trying to buy a home in Palo Alto or the Sunset are experiencing.

So, what does all of this mean? What we can say is that what should be is sometimes, what seems logical is sometimes, and what can be often is just because it can be. We call this latter the emotional approach to value. There are no set rules and the journey is often not the one we expected. In the end, buy in a good location, take out a conservative loan, and wait 5
years. From Palo Alto to Novato, real estate will reward you.

The Market is Healthy in 2011

If you are among the buyers who have been waiting for the bottom of the real estate market, that point has passed you by. Looking at the sales data, posted above, notice that pricing has jumped up quite a bit; due in large to multiple offers becoming common again in San Mateo County, and looking from a personal standpoint, the fact that pricing is the best I have seen in my 20 plus years of selling homes. Buyers are again eager to get into the market. The sampling data is large enough to give us good data, including all sales of single family homes and condominiums in the entire county.

Fannie Mae and Freddie Mac have once again made it even harder to borrow.

I know a young woman who owns a condo. She purchased it back in 2006 when of course it looked like a great deal. No one would have criticized her for the purchase at the time. She is now deeply under water. But she still has her job, and can still make the payments. She wants to buy a house. Houses are now going for less money then she paid for her condo. She wants to walk, but of course if she does that, she won’t qualify for a loan. Who would want to lend to a person who just walked from her obligation?

She can afford to rent the unit out, and her negative would only be 400 a month, seems like a perfect solution, doesn’t it? Rent it out, buy the house, and in time rent will make it a great investment. Trouble is though she has over 100,000 invested in the unit, she has no equity. The new Fannie Mae requirements are that you have a 30% equity in your rental, plus a years lease. So she is in the perfect catch 22, where she cannot hold it (and buy), nor can she walk away and move.

The Current Home Loan Market

We were talking in the car, the other day and my wife admitted to me that she was glad she listened to me a few years ago. We had refinanced our mortgage, and I wanted a variable loan, and she wanted a fixed rate loan.

The fixed rate seemed conservative, as the rates seemed likely to go back up. Our first loan was at 17%, so 7% seemed rather desirable. Currently our variable loan rate is in the low 4’s.

Speaking to my loan broker, Brian McNamara, -hmbloans @ aol.com- rates may be at an historic low in January. This coupled with the low cost of housing, the best I have seen in 20 years, makes the next few months look like an historic opportunity for buyers.

Brian tells me, “Rates for loans above $417,000k to 729,750k are very close in rate to the conforming loans below 417k”, but he says that qualifying is much tighter then the “bad” old days. “lenders want to see income and taxes, and minimum credit scores are higher”.

Still I wouldn’t own a house today, if I hadn’t taken the plunge, so long ago, i.e. 17%. And variable rate loans and “negative amortization” still hold a fond place in my heart.

San Mateo County Housing Values Stabilizing

Zillow sent me the link below about average housing prices in Moss Beach since 2006. I thought it was interesting, because I had just made a similar chart from MLS statistics for my open house last weekend. http://www.zillow.com/local-info/CA-Moss-Beach-home-value/r_53424/?scid=emm-101110_OctLocalPROClaim-bab

My chart is for the San Mateo Coastside so the data may be a little better; since the sampling is a larger slice of the pie, and I notice both curves show a leveling of values over the last few quarters.

Now I don’t really believe the average value (median) of housing in Moss Beach was ever 900k, which leads to the old notion of Lying with statistics. My data includes condos and places like Pacifica, which don’t always command the highest values. I have noticed over the course of time that often Moss Beach‘s average value is relatively higher then the rest of the Coastside.

I don’t believe that this means that a ‘70‘s build 2000 sq ft house in Moss Beach commands any more money then a similar one in HMB, but rather that since the sample is smaller, Moss Beach’s average values are more readily effected by a couple large ticket sales then other areas of the Coastside. Moss Beach has more cliff side, and acreage properties relative to more normal housing then other places on the Coastside.

I hope you find this interesting, and I want to express again that it appears the value of homes, not just on the Coastside, but throughout San Mateo County have leveled out, and appear to be stable, since early 2009.

Half Moon Bay's Pumpkin Festival

This year’s 40th festival will be held on October 16-17 from 9 a.m. to 5 p.m. Admission is free. For you that don’t know, this is a huge street fair, the largest of the year in Half Moon Bay. This would not be the day you wanted to look at property on the Coastside. The highlight of the fair is a pumpkin weigh off. Individual pumpkins are brought in one at a time on flat bed trucks. These monster pumpkins, weighing in excess of 1,000 lbs, often brought in from Oregon or further, will be carved after they are weighed. They are surreal items, and quite interesting to see. There is also a pie eating contest, and Half Moon Bay winery serves it’s “pumpkin" wine at the event.