Amissville, Virginia
An ongoing dialog on real estate news, opinion and trends in Northern Virginia and the greater Piedmont area.
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Sep. 9, 2008
Categorized in: Mortgages
I've waited a few days to talk about the Fannie Mae and Freddie Mac bailout. There are two reasons for that. First of all, I don't think we yet know what the effects are really going to be. Secondly, I'd posted when the legislation was passed in July that I was uncomfortable with the idea but didn't have a better one. Clearly the markets told us yesterday that they think this is a swell idea. And, from their perspective you can certainly see why. Risks for investors have been reduced. Instead, risks for taxpayers have increased. (Hmmm, aren't investors also taxpayers?) As a taxpayer, I remain skeptical about this use of my money. As someone who makes a living in the real estate industry, it gladdened my heart to see mortgage interest rates drop a full half percent yesterday. Long term, the model of Fannie Mae and Freddie Mac doesn't seem to have served us well. Whether some tinkering with the mechanisms can fix it or whether it needs to be scrapped completely will be debated over the next year. The other debate will be over whether we, as a society, want to make home ownership a high priority. I suspect most are still in favor of this, even given our current difficulties. But I think a lively debate over how we allocate resources and what we believe in, is always a good thing!
Jul. 25, 2008
Next week the President is likely to sign into law the most far-reaching housing bill any of us have seen in at least a generation. Now that the details seem to have been worked out, it's time to talk about what this means.
First, you should know that almost no one really likes this bill. But even those who don't will generally admit they think it's a necessary evil.
Strangely enough the piece of the bill likely to have the biggest long term impact is the last minute addition thrown in to address what's happened at Fannie Mae and Freddie Mac. In the short term, this is a good thing. If you think the local real estate market is tough now, a Fannie Mae/Freddie Mac collapse would have put us into a tailspin with very dire broad economic consequences. In the long term, this is probably not a good thing. It's a band-aid and doesn't ensure there's any reason for either of these institutions to behave more responsibly in the future. And, there's certainly no sign anyone will be held accountable!
The pieces of this bill that are designed to immediately impact the housing market seem unlikely, in my mind to have much real impact.
The first piece I'll focus on is the provision that is supposed to encourage lenders to renegotiate mortgages for troubled homeowners. So, let's say you bought one of those new homes in Culpeper a couple of years ago. You paid $400,000 (with 100% financing) and now the thing is worth $200,000. This bill suggests that the bank provide you a new mortgage at 90% of the current value of the home. In this case, it would be $180,000. The rest of the debt would be forgiven. The bank has just eaten a $220,000 loss. In addition, they will pay an additional 3% fee to FHA which will then guarantee the mortgage.
The supposed payoff for the lender is twofold. First of all, they don't end up with a foreclosed home on their hands. Foreclosed homes are a money drain for any institution. They're expensive to maintain and the cost of selling them is something banks hate. The other payoff for the lender is that the mortgage is now guaranteed and they know they won't lose their shirt on what's left.
Since this program is entirely voluntary, is that enough incentive given the size of some of these losses? Obviously, I don't know. But I wonder if we'll see the most impact on those communities that weren't that badly hit, where the losses that the banks eat will be smaller. If your a bank, maybe this program makes sense where the original home price was $400K and the current value is $370K. So, help may go to those places that need it least!
The other piece I'll talk about today is the $8000 7500 credit for the first time home buyers who buy foreclosed homes any primary residence. Overall, this is a good thing. It's certainly a nice bonus if you're a first time home buyer! And, we certainly need to move those foreclosed homes out of inventory faster.
But if you're Joe Seller, trying to sell your home and the home next door is a foreclosure, buyers have an awfully big incentive to buy that home rather than yours.
If you've got opinions on these parts of this bill, or on other provisions, chime in. Is this, on balance, good or bad? Will it do any good for our local markets?
Jul. 15, 2008
Categorized in: Mortgages
The bigger they are the harder they fall.
That statement definitely applies to Fannie Mae and Freddie Mac. Unless you've been under a rock the last week, you've heard about the trouble they're in.
Fannie and Freddie are a big part of why your local bank can offer mortgages. The bank loans you the money to buy your house. But it's going to be a long, long time before they get that back. And, it doesn't take too many mortgage loans before they're out of money to loans. So Fannie and Freddie buy mortgages from your bank. Your bank then has money to make another loan. This keeps a lot more money available for buying houses. It also keeps mortgage rates lower.
I don't think anyone feels good about the steps the government is taking to shore up these two behemoths. This is not how the free market is supposed to work.
But Fannie and Freddie have never really been pure capitalism at work. They are an odd blend of a corporation and the government entity.
Something had to be done now to keep the real estate and financial markets from further imploding. But I think there needs to be a short term strategy, meant to keep the markets calm and functioning and a longer term strategy that looks at the functions performed by these two entities and how those functions are best performed.
My belief is that if Freddie & Fannie weren't allowed to buy any more mortgages, eventually, another entity (and hopefully 3 or 4) would be created to fill that void. So, long term, how do you begin to ease Fannie & Freddie out of the business or at least into a smaller role.
The biggest problem here may be the shareholders of these two corporations. But, given what their stock prices are doing, it shouldn't be long before they are easy pickings for an enterprise that's truly commercial.
Now, does the political will and the creativity exist to envision something different than our current mess?
May. 21, 2008
The Culpeper Star Exponent reports that two condominium projects slated for Culpeper have been pulled due to current economic conditions as well as the state of the local real estate market. It's not that Culpeper wouldn't be better off with more condominiums in the housing mix, but it's definitely the wrong time. For weary sellers, less competition is good news!
And, that's only a small piece of the good news in the real estate market.
Fannie Mae and Freddie Mac have dropped their "declining markets" indicator. Since just about every local jurisdiction had been labeled a declining market that's big! This indicator meant buyers had to come up with more cash to buy homes in this area. In a market already starved for buyers, this was not helping! Don't expect a flood of new buyers as a result of this, but it should help out a few buyers who were short that extra cash.
And, let me leave you with one more piece of good news. No housing market is completely depressed or completely robust. There are always pockets that are thriving even in the toughest markets. One of those areas here is the rental market. Rentals that are well-priced and in good condition are moving, sometimes pretty quickly. The summer season should be a good one for the rental business. And some sellers might be well-advised to consider renting out their properties that aren't selling.
Dec. 21, 2007
Categorized in: Mortgages
We have a guest blogger today, Phil Denfield from First Heritage Mortgage. Phil's always sending me tremendously useful information and this post is no exception. Thanks, Phil!
I have recently heard from a number of realtors who have had questions about changes in lending guidelines as they pertain to the maximum allowable financing on properties in our area. I thought it would be appropriate to try to give you some information and clarification regarding the changes we have been alerted to and those that have already taken place. Changes are coming almost daily in the mortgage business and as we look ahead to next year. Fannie Mae and Freddie Mac have recently announced changes to their guidelines for loans made on properties found to be located in “Declining Markets”. The first question I am always asked is, “What determines a declining market?” The answer can be found either on the appraisal or in the details of an automated loan approval from one of the automated underwriting systems (ie. Fannie Mae’s DU engine or Freddie Mac’s LP underwriting engine). First, it is the job of the appraiser to assess the relative strength of the market where a property is located. For many years, the small check box on page one of the appraisals was largely ignored since we were blessed with an expanding market. Now, appraisers are marking the check box indicating a “Declining Market”. Unfortunately, this current trend has caused all of the major national lenders, including the two biggest, FannieMae and FreddieMac to reassess their guidelines regarding lending in areas with declining markets.
In its December 5, 2007 Announcement 07-22, FannieMae amended its guidelines to state that “When a property is located in an area identified as declining, Fannie Mae will now require the lender to offer financing at LTV and CLTV ratios that are five percentage points below the maximum ratios allowed for the selected mortgage product.” They went on further to put an additional responsibility on the originating lender to use additional resources to determine the strength of the market on appraisals where the appraiser indicated the market as stable. They have directed us to ask for additional comps and other statistics on the local area to justify the “stable” evaluation. Most appraisers are now providing comps “on the market” as well, to demonstrate “current market conditions”. This serves as a more current indicator of the market than even sales that occurred a month ago. Freddie Mac has announced similar changes to their guidelines. FannieMae, FreddieMac and other automated systems have or will be making changes to their Automated Underwriting Systems (AUS) to address areas with declining markets. If they have not already done so, they will be building zip code indicators into their systems that will cause a warning to print out on the loan approval sheet stating that the subject property is located in an area of declining values which would prompt the 5% reduction in the allowable lending ratio. Therefore, when a prospective buyer has a “pre-approval” or an “approval” that was based done without a specific property address or zip code, the approval itself may very well be called into question. My advice to you would be to make sure that you understand how this could possibly affect either your potential buyer or a seller who has accepted an offer.
Our particular investors are providing some potential relief in certain circumstances. As soon as I take the time to explain those circumstances, they will most likely change again, but I have provided some information below that may help clarify what we know right now. As I said, the main determining factor is the appraisal. I have spoken to all of the appraisers I use and they tell me that most areas will have to be marked as “declining”, which means that more than likely the financing will have to be reduced by 5% from the maximum allowable limits. However, we do have some outs so don’t be totally depressed. There are areas that may not have to be marked as declining due to market trends in that particular area or neighborhood (see excerpt from an appraisal below). Another alternative is to use an FHA or VA loan. The government loans do not currently have these restrictions. Below is some additional information you may find helpful that was extracted from information provided to us from our investors.
Summary of Declining Market options:
Please note the these policies are specific to appraisals marked as a declining market, AUS messages addressing declining markets or investor-published lists of areas of declining markets. For most of our investors, we no longer must automatically reduce the maximum allowable LTV/CLTV when the only indication of the possibility of a declining market is on the AUS report. We must refer to each investor’s specific guidelines, but for several of our investors’ programs, we have the following options if our AUS report indicates the possibility of a declining market and the appraisal does not indicate a declining market:
1) Reduce the maximum allowable LTV/CLTV limit per program guidelines.
2) Or, If the LTV/CLTV is above 90%, the file may be submitted directly to the investor for underwriting at the maximum LTV/CLTV;
3) Or, if the LTV/CLTV is 90% or below, the file may be submitted to our underwriter for a preliminary review at the maximum LTV/CLTV. The underwriter will determine where the file needs to be underwritten based on the strength of the credit package and appraisal.
If the appraisal indicates a declining market, more than likely the maximum financing will be 95% for conventional loans or the buyer would have to use FHA or VA unless they fit in a very small box of other possibilities that currently exist. Below is an excerpt from a recent appraisal that was marked as stable based on information in the area where this home was located.
Apr. 17, 2007
I'll bet you all had given up on getting any good news on the housing market front! But here it is, front and center in many of today's financial publications!
Fannie Mae and Freddie Mac have just announced that they're going to provide help to subprime borrowers. The CEO of Fannie Mae will testify before Congress today that they are coming out with a new loan program to help borrowers transition out of some of the high risk ARMs. And credit requirements will be loosened to help more people qualify. In addition, Fannie Mae and Freddie Mac will be buying more 30 year fixed and 40 year fixed mortgages on the secondary market.
You're selling your home and wonder how that helps you? I'm glad you asked!
This should mean a reduction in the number of foreclosure properties coming on the market. Foreclosure properties drive prices down. Financial institutions have absolutely no emotional attachement to the houses they sell. They never, ever say with great indignation "I am not giving this house away!" They simply do what it takes to sell the house. In this market that means lowering prices dramatically below similar properties on the market. That makes it tough on every other seller in the neighborhood, both from the perspective of holding the line on price reductions and on getting the property to appraise at what you do sell it for. So this is definitely good news.
I also think it's quite possible that a secondary result of today's news may be a slight lowering of interest rates. More money available from Freddie Mac and Fannie Mae in the secondary mortgage market could help on that front as well.
These days, sellers need to look a little harder for the good news! But there is some out there today!
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