Archive for the ‘Mortgage’ Category
Traditionally when you buy a house using a loan you get pre-approved by your banker or mortgage broker up front, based on some preliminary information about your financial profile, like credit scores, income and assets, and existing debt. Then once you get in contract on a home the lender underwrites the loan during the loan contingency period, typically a 10-17 day window after the offer is accepted. During that time the underwriter verifies employment and income, receives and reviews the appraisal, and gets other information and paperwork he needs so the bank can issue a firm approval. Once that approval is given then you can remove the contingency and proceed with the sale. But that waiting period puts you at a disadvantage when up against a cash buyer in a multiple offer situation.
In extremely competitive markets like Marin County and San Francisco we’re seeing a new trend. In an effort to compete with cash buyers some home purchasers are getting full credit approval in advance, where their mortgage banker actually sends their file through underwriting up front, so the loan contingency can be shorter or even in some cases waived altogether. With cash buyers often coming out on top in multiple offer situations it’s natural for those using financing to look for ways to be more competitive, so this may become more and more common as the hot market continues.
This more aggressive approach to financing brings up a couple of important questions. Is this method riskier than the traditional way of doing it, where a buyer has a contingency period during which she has an out if the financing doesn’t come together? And at some point will this become the new model for buyers getting loans? To this point this has been somewhat under the radar but the word is getting out, as the New York Times recently discussed the trend in a piece titled A New Weapon for Bidding Wars.
Also, even if you have no loan contingency, offers with financing are traditionally written with an appraisal contingency. If the property appraises for less than the purchase price the buyer can cancel the contract. Buyers have the option of waiving that contingency, but the bank will only lend based on the appraised value. So buyers who are at the limit of the loan to value ratio (for example 80% in a typical situation) have to bring more down payment money to make the loan happen. But some buyers who have enough money down, or the flexibility to increase their down payment if needed, are going in with no loan or appraisal contingencies, and thus being basically the same as an all cash offer. That’s a huge advantage and we hear from one mortgage banker we work with a lot that the majority of the deals he’s doing lately in San Francisco are structured this way, and it’s becoming more common in Marin as well.
It’s an interesting twist and the way things are going in this super competitive market it could become the new normal for many buyers. Considering you could forfeit your deposit if you make an offer with no contingencies and for some reason are unable to get financing, it’s not an approach to be taken lightly, and you need to be fully aware of all the risks before considering it. But if you’re writing offers in this crazy market it’s important to know that it’s happening, whether or not it’s an approach that would make sense for you.
It’s not really news that prices are high in the Bay Area, but check out this column in SFGate to compare what you need to make to buy a home here with the situation in other cities around the country. These income figures are based on the median price for a home in the metro areas as a whole and don’t take into account taxes, insurance, and other costs (or down payment), but are still useful in looking at relative affordability between cities. Maybe not a list you really want to be at the top of, but the demand for homes in Marin and other areas around SF is off the charts.
The Consumer Finance Protection Bureau’s new rules for underwriting mortgages will start next week, and they will mean some buyers who qualified for a loan before will not meet the requirements under the new standards, especially those who were close to the debt-to-income ratio cutoff or those considering an adjustable rate loan. There will be lenders offering loans outside of the new guidelines, so we’ll have to see how it all shakes out, but this would be a good time to check in with your mortgage banker or loan broker if you were pre-approved last year.
You can also find more info at the CFPB website.
It’s sounding like the government shutdown thing could mess with the housing market the longer it goes on. Here’s an article from the IJ, quoting a couple of the loan people we work with a lot. Let’s hope they get it together and get the government running again, and also avoid defaulting on the debt ceiling, which by all accounts would be a disaster. But in the meantime, a good idea to discuss potential delays with your mortgage person if you’re getting into contract on a home during all of this.
There’s been a lot of talk lately about the effect of rising interest rates on the market, including this article from SFGate. While it’s not hard to imagine that 6% mortgages and the corresponding reduction in affordability would have an impact on the demand for Marin’s high priced homes, that would still be a relatively decent rate by historical standards. And we’re far from that at this point anyway–just was quoted 4.375% for a jumbo 30 year fixed today from our in house Wells Fargo affiliate. Of course that assumes a 780 FICO, but that is still a very low rate. Going to be an interesting fall!
All-cash offers are pretty commonly the ones that win out in competitive situations these days, and buyers with loans often ask us why cash matters so much. They wonder why, if the seller is going to get their money at closing either way, would they consider the cash offer to be so much more appealing, and it’s a really valid question.
At the most basic level the reason is simple: sellers don’t like contingencies that mean they have to wait for weeks to see if the buyer might back out. If a buyer is cash, with no contingency for the loan and appraisal, then the seller knows the deal won’t fall apart due to financing issues no matter what the price is and how it relates to other recent sales. This means that in many cases cash buyers are setting the new comps.
Prices would not be going up as quickly if the winners in so many multiple offer situations weren’t cash buyers. Since they aren’t limited by an appraisal they are free to offer as high a price as they like. If someone were buying the home with an 80-20 loan and had limited funds for the down payment, they could only offer so much. And anyway, the seller would balk at an offer that was way over the recent comps as it might not appraise and the buyer could then back out. But the same high offer from a cash buyer is a sure thing since no bank or appraiser has to approve it. That’s the aspect of the equation a lot of people aren’t considering when they ask why cash and a loan aren’t the same.
This dynamic, with cash buyers being able to offer prices that are way above what the comps say the value is, means prices shoot up more quickly than if the market were ruled by people with 10 or 20% down. Homeowners who are watching this price appreciation and looking forward to bringing their homes on the market are certainly happy. But buyers who are trying to get into a home after saving up their 20% down payment are often feeling frustrated, losing out in multiple offer situations and seeing prices shoot up at the same time.
It can be tough to compete with aggressive, all-cash buyers but there are some strategies that can make an offer with financing more competitive. We are always happy to help buyers figure out the best strategy for their situation, so drop us a line if we can help!
As I mentioned a few weeks ago, the Mortgage Debt Relief Act was set to expire yesterday, but was renewed in the bill congress passed late last night…big news for sellers considering a short sale. It also included a revival of the tax deduction for mortgage insurance, which had lapsed after 2011, which is good news for FHA borrowers. The Wall Street Journal summarizes the changes here. They didn’t go after the mortgage interest deduction yet, but it sounds like that could still happen so we’ll keep tabs as things develop.
I’m sure you’re as tired of hearing about the “fiscal cliff” as I am, but there are some important issues in the mix for home buyers and sellers. One option being considered is a change to the mortgage interest deduction, which could be a big deal, depending on what exactly the change turned out to be. Our local IJ real estate reporter summarizes here.
And so far there is no word about an extension of the Mortgage Forgiveness Debt Relief Act, which expires at the end of the month, and would have major implications for homeowners who are underwater and considering a short sale. There’s a good explanation of the issue and the potential impact of congress failing to act here. It’s not as big of an issue in Marin as it is in many other parts of the country since the number of short sales has fallen so drastically here this year, but it’s still important and would likely have an effect on our market to some degree.
Our team has been having some really interesting discussions about short sales lately, and how little consistency there seems to be in how they’re being handled. At this point most people are familiar with the term, but for those who aren’t, a short sale can be an option when a homeowner needs to sell but owes more than the property is worth. The owner accepts an offer pending approval by the bank, which must agree to take a short payoff to make it happen, and that approval depends on the seller demonstrating financial hardship and the lender’s acceptance of the sale price as market value. It can be a great alternative to foreclosure for both sides, but by nature there’s a lot of room for ambiguity and no real standard for the process.
What got us talking about this recently was how we sometimes see a short sale listing come on MLS that is either already contingent with an accepted offer, or that goes contingent right away, and then ends up closing a few months later with the listing agent (or another agent in that same office) representing the buyer too. That means the property wasn’t exposed to the market and other buyers weren’t given a chance to make offers, and the offer that’s being sent to the lender for approval may not be the strongest that might have been out there.
Lenders don’t generally scrutinize the marketing of short sale listings like they do with foreclosures. For example, with an REO they often require the agent to expose the house to the market for a minimum number of days before taking offers, in an effort to ensure they’re getting the best offer rather than taking the first one that happens to come in. This isn’t normally the case with short sales. The lender might require the property to be listed on MLS, but it’s not common for them to ask for specifics about when the offer came in or how much actual market exposure the property was given.
Of course, with an REO the bank is actually the seller of the property, whereas with a short sale the owner of the home is the seller and the bank is just approving the sale, since they’re the ones taking less money than they’re owed when the lien is payed off at closing. This is an important distinction since it brings up the question of fiduciary duty and who’s calling the shots.
Agents have this fiduciary duty to their clients, meaning an obligation to represent their clients’ interests above all others, especially including their own. And in a short sale since the client is the homeowner, not the bank, the listing agent’s duty is to help the seller get the short sale approved and avoid foreclosure. In many cases the seller doesn’t really care what price the house sells for as long as the bank approves it and the deal closes (assuming they have no tax consequences or deficiency judgement), so it may seem like a good idea to just take whatever offer the agent has and send it off to the lender for approval to get that process underway, which can take months. But we think it’s fair to question that strategy.
Barring special circumstances, like an imminent auction date, we think it can be in the seller’s best interest to see what might be out there by putting the home on the market, at least exposing it on MLS for a week let’s say before accepting anything, rather than letting the listing agent pre-sell the home to his or her own buyer client. The strongest offer will have the best chance of getting approved by the bank, and that offer from the agent’s in house client might be “good enough” in the agent’s eyes but might not be the strongest. We’re not fans of agents “double ending” their own listings in general, but there seems to be even more potential for conflict of interest where a short sale is concerned. And if the listing agent has a willing buyer all ready to go, then it’s likely that buyer will still be there a week later if it turns out he’s actually bringing the best offer.
Short sale sellers are typically in stressful situations and just want to get the house sold and move on, and we don’t like to see agents taking advantage of the situation, either out of laziness or because they want to get a good deal for a buyer they’re also working with. There is also the neighborhood to think about. If you sell a home for less than it would be going for on the open market then that can affect prices in the area, as that sale will be used as a comp for other homes. Some sellers may not care, but we’ve worked with many who don’t want to hurt their neighbors’ home values if they can help it. Why not expose the property to market for even a minimal number of days if you have nothing to lose by doing so, and potentially much to gain for you, the neighbors, the bank, and the housing market in general?
President Obama followed up his State of the Union mention regarding more help for underwater homeowners with an announcement yesterday. Looks like there will be hurdles, including congressional approval, and it’s linked to a tax on banks. But making it possible for people to refinance and take advantage of low interest rates so they can keep their homes sure sounds better than more short sales and foreclosures.