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Ken Roberts - Real Estate Column - A New Year-A New Beginning

Ken Roberts - Real Estate Column - A New Year-A New Beginning

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I couldn’t help but be moved by the outpouring of hope generated by the results of the presidential election, both here and abroad. Mere words cannot adequately describe how monumental a shift in the power of possibility that exists now more than ever before. It has been said that a journey of a thousand miles begins with a single step. We have taken a giant stride in the direction of one world, one people. There’s no doubt a very long journey lies ahead. At times, real change arises from the aftermath of catastrophe. The possibility for great change lies before us. However, there is still much to do.
With the economy in shambles, the banking and auto industries in tatters, the national real estate market in a freefall with foreclosures rising like flood waters from Katrina, and a credit crunch squeezing business and consumers alike, one might ask if there a silver lining anywhere. The answer is yes.
ARTICLE CONTINUES
I couldn’t help but be moved by the outpouring of hope generated by the results of the presidential election, both here and abroad. Mere words cannot adequately describe how monumental a shift in the power of possibility that exists now more than ever before. It has been said that a journey of a thousand miles begins with a single step. We have taken a giant stride in the direction of one world, one people. There’s no doubt a very long journey lies ahead. At times, real change arises from the aftermath of catastrophe. The possibility for great change lies before us. However, there is still much to do.
With the economy in shambles, the banking and auto industries in tatters, the national real estate market in a freefall with foreclosures rising like flood waters from Katrina, and a credit crunch squeezing business and consumers alike, one might ask if there a silver lining anywhere. The answer is yes.
ARTICLE CONTINUES

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Published by: Business Insider Magazine on Feb 28, 2009
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By Ken Roberts
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couldn’t help but be movedby the outpouring o hopegenerated by the results o thepresidential election, both hereand abroad. Mere words cannotadequately describe how monu-mental a shit in the power o possibility that exists now morethan ever beore. It has beensaid that a journey o a thousandmiles begins with a single step. We have taken a giant stridein the direction o one world, one people. There’s no doubta very long journey lies ahead. At times, real change arisesrom the atermath o catastrophe. The possibility or greatchange lies beore us. However, there is still much to do.With the economy in shambles, the banking and auto in-dustries in tatters, the national real estate market in a ree-all with oreclosures rising like ood waters rom Katrina,and a credit crunch squeezing business and consumersalike, one might ask i there a silver lining anywhere. Theanswer is yes.First, the state o the South Bay real estate market is hold-ing up ar better than some areas in Caliornia. Both theSan Diego and Orange County markets are experiencing alarger decline in prices than our local marketplace. But thisis as disjointed a real estate market as I have ever seen inthat price declines vary dramatically even within the samecity. Some areas or tracts may have prices stabilizing, whilein another area within the same zip code, prices are stillalling. Short sales (where the bank agrees to take less thanwhat is owed against the property) and oreclosures thatcome back on the market as bank-owned properties (REOs)are making appraisals challenging. In act, new appraisalguidelines or a declining market require appraisers to useat least two comparable sales (comps) rom the last 90 daysinstead o the usual 180 days. They require a pending saleand a current listing—or two current listings—at an equalor higher value than the comps. I the comps support theappraised value but the pending sale and current listingare lower, the appraised value gets adjusted down accord-ingly.Second, the Federal Reserve, as part o the stimulus plan,announced it will be buying about $500 billion o newmortgage-backed securities rom Fannie Mae, Freddie Macand “Ginnie Mae” between now and the end o June, plusan additional $100 billion o existing mortgage-backed se-curities. This announcement caused mortgage rates to dropand started a mini refnance boom that over the next sixmonths could give borrowers with loan amounts under
A REAL ESTATE PRO’S PERSPECTIVE
$417,000 the opportunity to potentially secure some o thelowest mortgage rates o our lietime. The Fed’s commit-ment as a buyer o mortgages was intended to entice homebuyers back into the marketplace to help shore up prices.I the real estate market is stabilized, it is the frst step toboosting consumer confdence, stimulating retail spendingand thus sparking an economic recovery.As o January 1, 2009, the new high balance conormingmortgage limit or loans over $417,000 has been loweredto $625,500 in Los Angeles and Orange Counties rom the$729,750 limit o last year. We were hoping they woulddo away with the $417,000 breakpoint so that rates, lend-ing guidelines and loan types would be the same up to$625,500. But that was optimistic. In act, pricing above$417,000 is not only higher, but depending on the lenderand day o the week, it could be anywhere rom .25 to 1.0percent steeper in rate—or as much as two points (eachpoint is one percent o the loan amount) in ees! Pricing isvery volatile and guidelines dier slightly rom lender tolender. With loan amounts above $417,000, the amount o cash-out in a refnance is limited and there is an additionalone-point ee charged by the lender.For regular conorming loan amounts o $417,000 orless, we now have risk-based pricing depending on cred-it scores. Again, pricing may vary slightly rom lender tolender, but just know that a middle credit score below 740will cost you in additional ees, with pricing increases ashigh as three extra points or scores below 660. Now morethan ever, credit scores are incredibly important. A recent30-day late payment on a department store card o just$10 can drop your score 80-90 points! Regular conorm-ing cash-out refnances with middle scores below 740 alsohave pricing bumps.In the old days, FHA fnancing was difcult, expensive,slow and very fnicky about the condition o the property.Escrow periods were seldom less than 60 days. There wasonly one interest rate to choose rom, and the seller wouldhave to agree to pay several discount points or the buyerto get that rate. I a property had any deerred maintenance,it would have to be repaired prior to the close o escrow.And then real estate values rose much aster than FHA loanlimits, rendering the loan program nearly useless to evenentry level buyers in most o the South Bay. Today, mucho that has changed. While owner occupancy is still a re-quirement, FHA loan limits have increased to $417,000 orregular FHA and $625,500 or jumbo FHA. While there areseveral dierent FHA loan products today, the most popu-lar is the 30-year fxed rate. You have the ability to buy therate up or down by paying more or less points instead o being limited to just one rate. Guidelines or regular and jumbo FHA aren’t as dramatically dierent as they are with
A New Year, a New Beginning
 
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over $625,500. There are a handulo banks, insurance companies andcredit unions lending out their owndeposits or jumbo loans and keep-ing those loans in their portolio andservicing them--meaning they collectthe payments. By not bundling themup and selling them in the second-ary marketplace to investors, theycan choose the rate, ees, loan typeand guidelines under which they willlend. For the consumer, that comeswith benefts and costs. The most ob-vious beneft is competitive rates. Weare seeing three-, fve- and seven-yearfxed rate ARMs, both ully amortizedand with an interest-only payment op-tion, rom the low to high fve percentrange. These are or loan amounts,with some lenders, up to several mil-lion dollars. Thirty-year fxed jumbosare very difcult to fnd at a good (be-low seven percent) rate right now. Thedownside, or costs, associated withlenders still making jumbo loans at at-tractive rates are stringent guidelines,high credit score requirements, andvery low loan-to-value ratios. In short,only the best o the best borrowersand properties make the cut. Somelending guidelines are a little crazyat times, such as not lending on acondominium project that’s less than10 units, or 70 percent loan-to-valueor single amily residences but 55percent loan-to-value or condomini-ums. How about not counting rentalincome rom an investment propertyi the tenants are on anything shorterthan a one-year lease? Then there’salways payment shock. That meansi you are paying low rent in order tosave up or a home purchase and yourconventional fnancing. The biggestdierence is that with regular FHA,with compensating actors, you canget a borrower approved with highdebt ratios. Jumbo FHA will be moreconservative. With the ability to pur-chase a home with three and one hal percent down, (all o which can be agit), add several non-occupying co-signers, (co-mortgagors) while blend-ing all borrowers income and debtsin order to qualiy and allowing lessthan perect credit, FHA is making amajor comeback as the loan producto choice or many borrowers. FHAguidelines require the roo to have atleast two years o economic lie re-maining, and any health and saetyviolations have to be corrected priorto the close o escrow. That and FHAdoesn’t like peeling paint. Any interioror exterior peeling paint has to be re-painted. The biggest limitation is themaximum FHA base loan amount o $625,500. As with conventional con-orming loans, there are price bumpsor loans over $417,000 and or de-clining credit scores. Mortgage insur-ance (MI) o a little over a hal per-cent is required on FHA loans as wellas an upront MI premium o at least1.75 percent i the loan amount canbe fnanced by adding it to the loanamount, even i you are at the loanmaximum. Some investors who pur-chase FHA loans will allow you to re-move the MI Premium rom your loanater a minimum o fve years and i the loan is paid down to 78 percento the original loan balance. In manyinstances, an FHA loan can be used torefnance when there isn’t enough eq-uity to meet conventional guidelines.Because o the upront MI premium
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that’s added to the loan amount, yourholding period or the property shouldbe long enough to cost-justiy the re-fnance. Once you have an FHA loan,should rates decline, you may be eli-gible or an FHA streamline refnance.It doesn’t require a new appraisal, soit’s possible to refnance even in theace o declining values.I you are a veteran, VA loans are stillaround. They also have increased loanlimits to a maximum o $417,000 withno money down and no mortgage in-surance. Many ormer vets may besurprised to learn that today they canstill use those benefts to buy a home,even i they had owned a home previ-ously using their VA entitlement. Youcan be currently in active militaryduty or honorably discharged. Youdon’t need to be a frst-time buyer. You just have to owner-occupy the prop-erty as your primary residence. I youbuy a property using your VA entitle-ment, you can’t buy another propertywith a VA loan as long as you havean existing VA loan, whether you arestill currently living there or not. Aterit is paid o, however, through sale orrefnance, you are ree to use your VAentitlement again and again. As withFHA, there are many rate and point op-tions available, making it unnecessaryor the seller to have to pay any pointson your behal-- and the 30-year fxedis the most requested loan type. Alsoo note is that there are some limitson some closing costs charged to theveteran, and some small charges arerequired to be paid or by the selleror the veteran.There are some lenders still mak-ing jumbo loans at attractive rates. Jumbo loans are those with amounts
If you think you can time the bottom of either the real estate market ormortgage rates, how well did you time getting out of the stock market? It’smuch better to get a good rate and a good value even if rates and prices wereto dip a tad further than to miss it by waiting.
 
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mortgage payments are going to be more than 100 percentmore than your current rent, no matter how high your creditscores, no matter how big your down payment is, no mat-ter how much you have in cash reserves ater the purchase,and no matter how big your income is, you will be declinedbecause you don’t have a history o paying a big paymentlike a mortgage! They can draw lines anywhere they wantand cherry pick all they want. At least there is good moneyout there available or higher loan amounts.The residential mortgage marketplace will continue to bevolatile, but within a range. I am recommending those in-terested in refnancing get all their documentation together,get approved and wait or a avorable day when mortgagebonds put on a big rally, causing rates to dip. Have a targetrate determined with your mortgage proessional so theyare prepared to pull the trigger and lock at the opportunetime. Don’t sit around waiting or some perceived bottomonly to try and scramble when it comes. I you are not pre-pared, ready and waiting, rates will dip and spike back upand you will miss it.I you are trying to buy in the South Bay market, knowthat we don’t have as many short sales and bank REOs asin some other areas. I you fnd one you like and it is wellpriced in relation to the market, it will sell ast, in multipleoers, over ull price and to the highest bidder with thelargest down payment and the shortest escrow period--usu-ally with almost no contingencies. I have seen oers sub-mitted on both short sales and bank REOs where ater twomonths o waiting, there hasn’t been a hint o an answer.Not an easy road… Sometimes you are better o trying tobuy a home that has been on the market or a long timeand has a large price reduction rom extremely motivatedsellers. Timing is everything. I you are buying up in pricerange in this market, it works well. You may be selling low,but you are buying low… and when prices rebound, yourpurchase will go up more in value than your sale property.I you are thinking about downsizing, sit down with yourmortgage planning proessional and see i makes sense topurchase now without selling. I your current residencewas your primary residence the previous two years, youcan rent it now and buy another primary residence. As longas you sell your previous residence within three years o converting it to a rental, it would still qualiy or the capitalgains tax exclusion or the sale o a primary residence o $250,000 tax-ree or a single person or $500,000 tax-reeor married couples. That way you could potentially sellinto a higher market later or more money. While there are
Continued on page 23Continued from page 13
A REAL ESTATE PRO’S PERSPECTIVE

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