Read beyond the headlines

I saw this on money.cnn.com the other day:

No wonder there is so much uncertainty as to what is going on. If you click the links you find that these stories cover back-to-back one-week periods. This sort of time period is hardly indicative of any trend, especially when they conflict with each other. Also, when you read beyond the headline about "sliding" applications, you find this information:

Refinance volume plunged 15.3 percent during the week, while purchase volume increased 6.1 percent.

So actually purchase loans increased during this time period which is a better indication of what the real estate market is doing. You certainly wouldn't know that from reading the headline.

CNN is of course dealing primarily with national trends which may or may not have any bearing on your local market. Keeping an eye on your local information and speaking with local professionals is your best bet to keep a finger on the pulse of market.

Mayor bans the phrase "I don't know"

The mayor of a Siberian town has banned 25 phrases including "I don't know", "I can't" and "It's not my job". People using these phrases will be on their way to unemployment.

I embrace this mentality. In past jobs when I was supervising projects and people, when people contacted me with a problem, I expected them to have thought of some possible solutions before they contacted me. They were deeper in the project than I was and would have a better understanding of the problem. They often came up with good solutions, and could then check in with me for my opinion on which course was best. It certainly simplified my job and as the article states "To say 'I don't know' is the same as admitting your helplessness."

As an Integrated Agent, any time I normally would answer 'I don't know', I replace it with "I will find out". I try to have as much knowledge as possible, but I am certainly not all-knowing. I am your advocate and it is my responsibility to provide you with the best information possible. And you definitely won't hear "It's not my job". That is just another dead-end answer. I will contact the responsible party and find out what is going on. As always, I want you to be the strongest, most well-informed buyer out there.

How walkable is your new neighborhood

I have added a Walk Score tile onto my website. The Walk Score tile allows you to enter in an address and compute the walkability of the surrounding neighborhood.

The formula computes the score by seeing how close the home is to grocery stores, restaurants, coffee shops, etc. You can use this tool to compare different homes and neighborhoods you are considering. Check it out!

When the FED lowered the prime rate, why didn’t mortgage rates go down?

The Federal Reserve lowered the prime rate by .5 a point at their September 18th meeting. A major reason stated for lowering the prime rate was to prevent the mortgage market’s trouble from affecting the economy.

“…the tightening of credit conditions has the potential to intensify the housing correction and to restrain economic growth more generally. Today’s action is intended to help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets and to promote moderate growth over time.”

Their major concern is to protect the broader economy, not necessarily to save the real estate market. As I mentioned in an earlier post, I didn’t think that lowering interest rates would bring any new buyers into the market. As it turns out, lowering the prime rate didn’t produce a similar lowering of mortgage interest rates anyway.

Mortgage interest rates are not tied to the prime rate. They are more influenced by the bond market and inflation. The graph below shows how the rates have moved mostly unrelated over the past three years.


The immediate effect of lowering the prime rate is a drop in your credit card and home equity lines of credit rates. The drop in prime did little to lower mortgage rates, but they are still historically low. Lowering prime may help boost consumer confidence and might bring investors back, but if you’re waiting for them to drop prime again to get a better rate before buying a home, you may be waiting in vain.

“Mortgage Meltdown” is an overstatement

Part of the reason I haven’t written an entry on this blog in some time is the glut of sensational articles in the media. With headlines that scream CRISIS, MELTDOWN, and FORECLOSURE it is hard to get to the meat of the issue. Many potential buyers think that they can not get financing. This is not true for most borrowers.

First a little flowchart of how money is lent out. The mortgage broker or bank approves a loan for a home buyer. Rather than keep the loan and wait for the monthly payments, that loan is likely sold by the bank in order to get more funds to loan out. The way these loans are sold is by bundling many loans together and selling them as mortgage-backed securities on the bond market. Investors buy the securities and get a rate of return based on the types of loans in the security. The bank gets the needed cash to lend; the investors get a regular return.

The mortgage market’s problems stem from the past few years of easy lending requirements. The investors were all too eager to buy the mortgage-backed securities, not accounting that there was some risk attached to them. As the investors were buying without analyzing risk, some lenders (particularly sub-prime) stopped looking over borrower’s documentation. Borrowers were getting approved for more money than they could afford. Some borrowers never should have qualified at all. The lenders are to blame for not qualifying the borrowers; the borrowers are to blame for not realistically judging their ability to pay, and the investors are to blame for not balancing the return on investment vs. the risk.

Some loans started going bad --> Investors stopped buying the mortgage-backed securities --> Funds for new loans dried up --> Many lenders have gone out of business.

The remaining lenders have tightened their guidelines, partially to reduce the risk of foreclosure, but mostly in hopes of getting investors to start buying the loans again. This does mean that some borrowers no longer qualify, but many still do. The high loan-to-value and “no documentation” loans are largely gone, but the borrower that earns a paycheck and has a decent credit score can still get financing. 100% financing is still available as well, and mortgage insurance (if needed) is deductible just like interest on your loan. Rates are still at historical lows. This is actually a great time to be a buyer with low interest rates, a large supply of homes for sale, and employment still strong in the area.

Some sanity has returned to the lending industry. Lenders are back to qualifying borrowers based on their documentation. The highest risk borrowers will not qualify. It may be a while before the panic of the investors subsides, but for many borrowers not much has changed.

A long walk to the bathroom

The city of Bothell has a population of about 31,000 residents, and it covers roughly 12 square miles. The odd thing about Bothell is that roughly half of the land area is in King County, the other half in Snohomish County.

A new condominium complex adds to this confusion. The county line splits the complex so that thirteen of the buildings are in Snohomish County and three in King County. Worse yet there is one building that actually straddles the line. This means that a home’s bedroom might be in a different county than the bathroom. I imagine the permit process for this building was a nightmare.

I wonder if they will get a property assessment from each county. Will the King County half be worth more than the Snohomish County half?

More Hints from the FED

On Friday, Federal Reserve Chairman Ben Bernanke spoke to a group of economists and indicated that the FED wants to avoid bailing out investors from the consequences of their financial decisions. Investors scooped up mortgage backed securities at an incredible rate the last couple of years. Often these securities were backed by riskier subprime mortgages, and these more speculative investments are now losing value due to the subprime mortgage market’s fallout. Bernanke indicated that the FED stands ready to take action if the financial markets woes spread too far into the general economy, but his statement seems to indicate he is trying to avoid a cut in the federal funds rate at their next meeting on September 18th.

Guidelines Getting Tougher

One of our lenders sent out an e-mail last Thursday that they were eliminating their 80/20 and 75/25 programs. Many borrowers had used these programs to obtain 100% financing while avoiding Private Mortgage Insurance (PMI). They would now only go to 95% financing.

Five days later they announced they would only go to 89.99% financing. Lenders are really pulling back from any loans with increased risk until the investor panic cools down. I imagine these programs will be back in some form in the future, but until then things can change daily.

Another agent in our office sent out this joke e-mail about lender guidelines. It’s an exaggeration, but it becomes less so day by day.

Very Important- Guideline Changes

· All borrowers must have one blue eye and one brown eye to qualify.

· LTV’s > 65% SISA Loans now require a minimum credit score of 849.

· For all LTV’s > 65%, 360 months of payment reserves now required.

· Borrower’s must have no previous bankruptcies in their family history going back three generations (including, but not limited to 2nd cousins twice removed).

· A minimum of 25 years self-employment history now required for all Stated Programs (at same location).

· Minimum Credit Score for Subprime Loans raised to 720.

· All non-arm’s length transaction borrowers (mortgage, real estate professionals,family members) will be required to provide full-documentation, subject to criminal background checks, wire tapping, strip-searches, blood tests, and a minimum of 12 hours of interrogation by the Department of Homeland Security.

Please note that these changes will go into effect within the next five minutes. So please lock your existing loans immediately. All existing loans in your pipeline must fund by noon today. The vast majority of fulfillment staff is off today, so no Rush Requests will be accepted.

We apologize for the inconvenience. We realize these are tough times in the mortgage industry for all of us. Be assured that we have a commitment to remaining strong and weathering out the storm. We ask for your understanding and cooperation.

McMansions Under Fire for Environmental Waste

Representative John Dingell, a Democrat from Michigan is drafting a “carbon tax” bill that will remove the mortgage interest deduction for homes over 3,000 square feet. Rep. Dingell is chairman of the House Energy and Commerce Committee. He realizes the proposal will be controversial, but he feels in order to address issues of climate change, we must address issues of consumption. Many of these larger homes have two story entry areas, vaulted ceilings, extra bedrooms and walk-in closets. All these additional space require more energy to heat and cool.

Critics point out that square footage may not be the best measure. Some newer houses are “built green”, and include energy efficient appliances, windows and heating systems. Also measurement of square footage often varies significantly, so it may be tough to police. Finally, the mortgage interest deduction is one of the biggest tax deductions for most Americans, and Capitol Hill will face quite a battle trying to take away this sacred deduction.

Houses are growing as families are shrinking

Nationally the average household has shrunk slightly since 1990, to 2.6 people. However in the same period, the average new house grew 400 square feet to 2,434. One in five American homes had at least 4 bedrooms in 2005. That is up from one in six in 1990. Locally 20.7% of homes in Washington have at least four bedrooms, up from 18.3% in 1990. Houses are growing in size as families shrink, even though cost of materials, labor and energy to heat and power the homes rise.

Some communities are fighting back, though their motivations are not likely ecological. In the Seattle/Bellevue area it has been a popular practice to tear down an 1100 square foot rambler and replace it with a 4,000 square foot home that bulges up to the property line. These “McMansions” as they are called overpower their neighbors and do not fit in with the neighborhood. Neighbors are fighting back and trying to get their cities to regulate the tear-down/rebuild practice.

Seattle is considering:
· Shrinking the height limit from three stories to two.
· The house can occupy only 35% of the lot. Currently it is 35% or 1,750 sq. ft., whichever is greater. This means a 1,750 house can be built even if the lot is under 5,000 sq. ft.
· Replacing multiple houses with one large one would also be prohibited.

Bellevue is considering:
· Requiring a certain percentage of trees on the lot to be preserved, possibly up to 15%.
· Measuring the height of the home by grade before construction begins. Some developers have changed the grades of lots dramatically to get around regulations.
· Requiring weekly removal of debris, distributing guidelines to developers, posting of informational signs before construction, and cleanup of abandoned work sites.

The cities are weighing the regulations against concerns over property rights and effects the regulations will have on home builders. Of course the larger homes often mean higher tax revenue for the cities, so I am sure that is a major factor in their decision.

Will a rate decrease boost the real estate market?

Lowering the federal funds rate might not have the immediate intended effect of making it easier for people to buy a house. There are many other hurdles to buyers trying to obtain financing. As the secondary market for mortgage-backed securities has dried up, many lenders large and small have disappeared. According to the Mortgage Lending Implode-o-meter, 130 lenders have gone out of business or have been bought out. Greenpoint Mortgage owned by Capital One was shut down just yesterday.

There are very few lenders issuing subprime or Alt-A loans. These are loans that many people turned to in the last few years as home prices increased dramatically. These lenders had expanded guidelines that allowed self-employed and lower credit borrowers to obtain financing. They are also where many borrowers found 100% financing. Even prime lenders have tightened their guidelines significantly in the past months in response to investor fears of mortgage defaults. Many have increased credit score and down payment requirements. They have also required borrowers to have more money in reserves as well.

Unfortunately with fewer places to find a mortgage, and with much tighter guidelines at the remaining lenders, many buyers are now out of the market. A rate drop may help the people who already qualify to afford a larger home, but it won’t necessarily bring more buyers into the market.

As it has become more difficult to obtain financing, it has become even more important to have an Integrated Agent in your corner. When anyone could get a loan, deals didn’t fall apart on financing as often as they had historically. Now that borrowing has become more difficult, our track record of closing 98% of our purchases will stand above the rest. Find out more about Integrated Agency and myself at www.seanday.net.

The Fed cuts one of the rates

The Federal Reserve cut their discount rate by half a point late last week, from 6.25% to 5.75%. The discount rate is the rate at which the Fed will loan directly to banks. They did not change the federal funds rate, which is the rate banks will lend to each other. This rate sits at 5.25% and is what prime (8.25%) is based on.

By lowering the discount rate, the Fed has tried in another way to infuse the lending industry with more liquidity. The Fed had already pumped billions of dollars into the banking system in the past two weeks. The rate drop came as a bit of a surprise, however, as there has not been a rate change between meeting dates since the week after September 11th 2001.

Their next meeting is scheduled for September 18th, and there is increased speculation that they will lower the federal funds rate. In a statement accompanying the rate decrease last week, the Fed indicated that they were now more concerned with adverse effects of market instability over their fears of inflation. This is a clear shift from their statement at their last meeting on August 7th.

The Fed steps in.

The turmoil in the subprime lending market continues to ripple through other markets. Though subprime loans are estimated to be only 13% of outstanding loans, and only 13% of those are late on their payments (1.7% of the total), investors are averse to the risk of possible loan defaults.

The Dow Jones industrial average has been erratic with triple digit swings in the past two weeks. A large French bank halted withdrawals from three investment funds that are tied to high-risk U.S. mortgage securities. They were unsure as to how to value the funds anymore. Commercial banks in Europe have been hesitant to loan to one another, causing short-term rates to rise. The Central Bank poured $130 billion into the banking system to shore up available funds, lower rates and calm investor fears. The U.S. Federal Reserve also injected $38 billion into our own banking system. They also allowed banks to use mortgage backed securities as collateral, attempting to show that these securities are still reliable. Speculation varies as to whether they will lower the federal funds rate at their next meeting.

Lenders are having trouble selling mortgage backed securities on the open market. By selling these bundled loan packages to investors, lenders get more funds to loan out. As fears of loan defaults grow, investors have stopped buying any loan packages that have any subprime loans in them. Many subprime lenders have gone out of business as they can no longer obtain new funding. Even prime lenders have tightened their guidelines significantly over the past month or so.

What does all this mean to you as the home buyer? Basically, it is more difficult to buy a home right now. There are fewer lenders and fewer loan programs to choose from. This is especially true for buyers looking for 100% financing. You must get a pre-approval ahead of time to be sure you can obtain financing before you bother to look for a home. It is even more important now to use an Integrated Agent to purchase your home. Your Integrated Agent will be intimately involved in both the real estate and the mortgage portion of your transaction. With the mortgage industry changing daily, you can’t afford to have any more uncertainty in your purchase.

Fed announces no change in federal funds rate

The Federal Reserve announced today that it will be leaving the federal funds rate at 5.25%. This is the ninth consecutive meeting where they have left the rate alone, after raising the rate in the previous 17 consecutive months.

“Economic growth was moderate during the first half of the year. Financial markets have been volatile in recent weeks, credit conditions have become tighter for some households and businesses, and the housing correction is ongoing. Nevertheless, the economy seems likely to continue to expand at a moderate pace over coming quarters, supported by solid growth in employment and incomes and a robust global economy.

Readings on core inflation have improved modestly in recent months. However, a sustained moderation in inflation pressures has yet to be convincingly demonstrated. Moreover, the high level of resource utilization has the potential to sustain those pressures.”

There had been speculation that the Fed would lower rates later this year as a reaction to the tightening of credit standards in the lending market. The above statement, though mentioning the credit issue, seems to indicate they are a bit more worried about inflationary pressures if they were to lower the rate. The bond market has indicated that mortgage rates may come down a bit, but it is difficult to predict with all that is going on related to the subprime market problems. Many lenders no longer exist, and remaining lenders have tightened criteria on loans, or eliminated programs altogether. Zero down programs still exist, but they are a bit harder to find and qualify for.

Capital One will now report limits

Capital One now says it will begin reporting their cardholders’ credit limits to the three credit bureaus. It has been a long-standing practice of theirs to only report the cardholder’s current debt, but not their limit. This practice has very likely harmed the cardholder’s credit score. Approximately 30% of your credit score is based on your utilization of credit. If you are near your credit limit, your score goes down, while low balances benefit your score. Ideally your balance would be below 30% of your limit on each card.

The problem with Capital One’s practice is that with no limit reported, the bureaus were forced to either ignore utilization on the account or use your highest balance as your limit. Let’s use an example of a card with a $10,000 limit, and you typically carry a balance of around $900. If the most you’ve ever charged was $1,000, your utilization would show as 90% rather than the real utilization of 9%. Your score would go down even though in reality you are managing your debt well. Lower scores translate into higher mortgage rates, which then translates into higher monthly payments. Once Capital One begins reporting credit limits, cardholders will hopefully see their credit scores go up in the few months.