Why isn't the home selling? It's the Price.

Now nearly two months into "historically low rates" and home sales really haven't perked up as much as one would think they should. Theories abound as to the the reason(s) why, so it's time to comment on some of those out there.

1) We "borrowed" buyers from the future with the tax credit:

Yes we probably did. There were a number of buyers I had an opportunity to work with that specifically mentioned the tax credit as their motivation to buy at that time. As proof look at the massive run up in offers in the last two weeks prior to the expiration date. The effectiveness of the tax credit is certainly debatable. Some analysts argued that the credit didn't really add that many extra buyers to the market as the expectation was that there were going to be 2 million first timers out there anyway, regardless of the credit.

While not being able to confirm it, Christine Kites of Keller Williams Mid Willamette's Broker Duo believes that the slow down after the credit's expiration is due to the fact that the "immediacy and urgency" to buy was removed from the equation. That sounds very reasonable to me as we have more of a buyer's market mentality now with lowball offers or buyers simply sitting on the sidelines waiting for the sellers to bleed a little more. If she is right then maybe the fall and winter selling season will make up for a relatively anemic summer one.

2) Anxiety about future economic prospects:

We all have our own personal markers for when we decide to make a large purchase. Potential buyers are understandably concerned about their ability to make a house payment in light of the current economic conditions. The prospect of committing to the biggest obligation they will ever make when they are watching their friends and neighbors lose their jobs seems counter intuitive to being a prudent consumer.

If one is concerned with losing a job in the future having a mortgage on a home is a far better position to be in than being a renter. Moral arguments and other considerations aside,  if I were one that had a job that allowed me to qualify for a loan now and I was worried about my future employment I'd buy a house, now. The reason is simple; If you are a renter and you don't make your house payment you are going to be kicked out in 30 days. The last stat I saw showed that the average number of days from first missed payment to the date the sheriff shows up at the door is 444 days.  A year and 3 months sounds like a much better timeline to get my act together than 30 days.

3) Price:

Anybody in lending that understands it will always point out that the cost of the money being borrowed has a bigger impact on the "affordability" than price. So, here we are. The refinancers have figured it out. Drop the interest rate save money, period. a 1% change in the rate of 30 year loan drops the P/I nearly 10%. Potential buyers know it. Time for the sellers to get on board too.

I liken the amount of profit one could make on the sale of a home as "game show" money. If I come in to the Price is Right I start at 0. If I run up my winnings and then lose it all because I spin the wheel too many times I end up with what I started, 0. Despite NAR's contention a primary residence is NOT an investment, it's a place to call home that allows you to control your personal living environment. It gives the homeowner an opportunity to live in a place that is safe and secure, surrounded by others in the same economic cohort. Plus Uncle Sam gives us some tax spiffs to boot. That is not the definition of an investment.

To be sure, there are some sellers out there that can't sell without bringing money to the table because they bought at the top of the market. However, many others have the opportunity to sell their homes at a "profit" should they choose to. The only real challenge Realtors are being presented with right now is getting those sellers that can sell to lower their prices. Sellers need to embrace the horror and stop waiting for the market to bounce back, it's going to be a long while and once rates start going back up buyers will be pounding on them even harder than now.  The question sellers should be asking themselves is, do they want to be "on" the market, or "in" it.

Willamette Valley Oregon Rental Market

I had the pleasure of attending a meeting where Dolf De Vos of IPMG property management was the speaker. He was asked to give his assessment of the rental market in the Mid Willamette Valley. It was great timing as he had just published his quarterly newsletter, Valley RE-View and there was a very good piece on vacancies for the towns on our area.

As suspected Corvallis, OR  has and will continue to be a strong market for rentals. Given it is a smaller community and has seen little if any growth in the inventory of rental units vacancies have dropped from a little less than 5% to under 3%. Eugene, OR also being a university town, has consistently seen those rates below 5% as well.

Somewhat surprising, though it I guess it shouldn't be given the hype and excitement over the coming medical campus, is Lebanon. That town's vacancy rate has dropped from a little over 7% last year to less than 2% this year. Lebanon seems to have some things going for it, some good, some bad. The impending influx of people for the new medical college and VA center are certainly good so Lebanon can hopefully break free from its' timber based roots. The flip side is that the foreclosure problem has hit this town, along with the rest of Linn County very hard. Unfortunately, when people lose their homes they become renters.

Both of these events present a potential investor with opportunities in that area. Lebanon has historically shown to have lower home prices than the surrounding communities. This coupled with low interest rates in my mind puts Lebanon at the top of the list in the mid valley for investment real estate.

It is interesting to note that in the run up in RE from 2004 to 2007 the market was flooded with would be investors looking to cash in. Some were taking the chance to "turn and burn" because values were moving so quickly. It's time for those individuals interested in making a long term investment in RE to get off the fence and take advantage of the current environment. Because interest rates are so low month to month cash flow is a reality in many homes available.

Timing the Market and the bottom of the Gravy Boat

Timing the market comes up in every conversation with a potential buyer. Some are convinced that prices will fall another 30%; they might, in some places. Others are concerned with the future of their personal economy. And though some can't articulate their specific concerns, nobody wants to "overpay" for a home. If there is no way to quantify every consideration in the decision to buy a home that means the conversation needs to be about being near the bottom of the bowl.


As any investor will know timing a market to maximize return is nearly impossible. The more factors, conditions or considerations that go into assessing the value of an investment the less likely one can hit the sweet spot. Real Estate is one of the most difficult to time. Condition of the home and surrounding neighborhood, time on market, sales prices of homes in close proximity, intensity of the owner's desire to sell, interest rates, borrower's confidence of continued employment, etc...don't forget location.  All these and more go into the determining the value of a home.


 Probably everyone in Real Estate has seen this type of graph:

I don't necessarily agree with the text, but I like the graphic. See all the happy sellers running away with their money on the right side. What we need to do is educate the buying public is that being near the bottom of the Gravy Boat is a great place to be and getting to the bottom is fairly impossible to accomplish. Maybe we say that if you are swimming in gravy you did OK.

Is your Loan Officer a Marketer or a Closer?

First a disclaimer or two:
Markeing is a necessary tool for any business to succeed. Without it you have no way to "get the message out" on your specific product or service. It gives you a "presence" before an opporunity to sell. Second, I have never been espeically good at it so I am a bit jealous of those that are,  but that is a curable issue.

It is incredible to me some Realtors are convinced into believing that just because someone has a great marketing plan means they can close deals. There are a couple of these "marketers"  in my area that are guilty as charged but will not be mentioned by name because, well, it just isn't nice and most who read this will know of whom I speak.

So here's the scoop: If you, the Realtor, are going to be referring your valuable clients ( AKA your next commission )  to a lender or if  your client absolutely must use "their guy" then for heavens sake make sure they can close the deal. Not by asking them, but by asking other agents that have worked with him/her in the last 6 months, yep 6 months max.  Just because someone sends you or your clients volumes of information or brings you cute little "pop by's"  ( that's a RESPA violation, $25K and some jail time ) to get your attention about all the cool programs they have ( 4 or 5 max, and we all have the same ones ) doesn't mean they or their company have the capacity to get a deal closed.


Closing a loan is dependent on the LOs understanding of the complete environment we are in.  Lenders are under ever increasing scrutiny. Not just from regulators but from the investors they sell the loans to. EVERYONE sells their loans to someone or retains the rights to do so at anytime so all must toe the line with investor overlays whether a LO wants to admit it or not ( or even knows ). What the LO knows about these changes and the effect they may have on your transaction matters, a lot. We all have little morphs and twists, often.

Is your buyer's LO a marketer or a closer? Here's the test...

1) Are the clients completely approved with specific conditions requested of them within 7 business days? An answer of no means you have a Marketer. Yes, means a Closer.

2) Does the LO "switch" programs to get a borrower through underwriting? An answer of yes doesn't necessarily mean you have a Marketer but a Closer is able to explain EXACTLY why it's being done and what the chances are for success.

3) Can the LO explain to you and your client in laymans terms what is required to get mortgage insurance on a conventional loan? An answer of no means you have a Marketer. Yes, means a Closer.

4) Can your LO offer you creative, alternative solutions to a difficult situation?  An answer of no means, well...a dead deal, and you guessed it, a Marketer. Like number 2 a Closer will have already fleshed out potential issues before an underwriter sees the file and has prepped the Realtor and client for this.

I pass this test as a closer. Marketing pieces ( except for this one ) don't talk about these issues because they are not sexy or attention getters. These are the nuts and bolts of the transaction. But these are the things that get your client a home and you your next commission check. If I was a Realtor or a buyer, I would take zero chances on a marketer and put all my money on a closer. Even if the closer seemed a little crabby every now and then.

Why are rates so low, I have a guess

As most consumers know because they have been pounded on by national lenders, rates continue to live in uncharted territory. Back in April there was a swing up in reaction to the fed exiting the Mortgage Backed Securities market. Within a couple of weeks though we returned to the 5% range.

Then, Europe ( spcifically Greece ) began having problems with generating enough tax revenue to pay all its' bills. As with the beginning of the mortgage meltdown anything even remotely associated with Greece was perceived as having the same issues. While that was not entitrely the case the perception that the EuroZone was not a safe place to invest had folks looking elsewhere to put their money.

Enter the US MBS market and a flight to safety, or the perception of it. Ask any borrower in the last 18 to 24 months and to a fault they will all say how difficult it was to get approved. After all the twists and contortions in the mortgage industry underwriting standards have become much more stringent and these instruments were or appeared to be effectively insured by the US Government. Investors simply were looking for a safe haven and the MBS market has provided that.

As much as investors loved the incredible returns on their MBS plays in the 00's now the MBS market is giving them something they want more, safety and security. If I were an institutional investor looking to make up for the mistakes of the last 5 years it might be that going back into MBS's would be the way to go. It might seem odd to go back to the thing that caused the issue in the first place but I would hazard a guess that now that these securites are so antiseptic or sterile they look pretty spiffy.

No rates are not down because the banking system is going to hell or that there is some evil plot by the banks to take over the world. As Karl Denniger is fond of saying, that's moon bats and tinfoil hat talk.

ARMs and I/O Loan Changes

A new wrinkle has been introduced to ARMs and Interest Only loans that will have a huge impact on those wanting to use these instruments. Going forward a borrower will be underwritten on the payment associated with the highest possible payment. This is a major change as for the most part borrowers have been underwritten using the start rate until now.

These changes are significant in that now a borrower must qualify for a a short term conventional ARM ( less than a 5 year fixed period ) on the greater of the fully indexed rate or the current note rate +2%. Today that means a borrower that wants a 3/1 Intermediate Term ARM that has a rate of 3.5% will have to qualify at 5.5%, a rate that is 1/2 % above the current 30 year fixed note. My experience of late has been borrowers wanting to use these loans have an exit strategy that will occur well before the reset. Plus they are financially savvy enough to manage their money and understand all the implications of their choice of product.

I/O loans are being made over as well. Higher minimum FICO scores to qualify ( 720 ) and a whopper of a requirement of having up to 24 months in payment reserves after cash to close is accounted for. I/O loans have already been pretty well beaten up with other restrictions in the recent past that have made them look like an ugly step child anyway so I can't believe that this new requirement will do much in terms of people not qualifying.

All these changes are really designed to ensure that the borrower has a true capacity to repay the loan. But in the case of the I/O changes I have to believe it is the beginning of the end for these products. Just like the first changes to PayOption ARMs and 2nd liens to 100% CLTV  the requirements are becoming so restrictive no borrower will want to monkey with them. As always Freddie Mac will eventually follow Fannie Mae, sooner or later.

No surprise to those of us in lending that these have been instituted. These are a continuation of the mandate that borrowers show a capacity to repay a loan, just like the good ol' days. Plus Fannie and Freddie have to find new ways to keep their income up from new loans to make up for the fact they are losing their asses on all the bad ones they ate up in the 2000's.

Wa Mu and the "Power of Yes"..what the heck?

I have had the opportunity to talk to several people about the changes in lending in the last 3 years and 2004 to 2007 seem like a bizarro fantasy land. Consider for a moment the following actual loans that were done:

Purchasing a duplex as a non owner occupied investment with a 80/20 ( 100% finanacing ) combo. Buyer put $1000 in earnest money and seller covered the buyers' closing costs. All for the seller paid closing costs. It's the buyer's money coming to the table loan or not. May as well spend it where it garners the biggest benefit.

No doc loan, AKA the infamous NINJA loan ( No income No Job, No Assets ) to 95% financing. No mortgage insurance on a primary residence. Borrower provided their name, SS #, address and phone number and allowed a credit report to be pulled. These were really No No's. I still don't think these are such a bad idea for the right borrower, just not everybody.

Cash Out Refinance of a single family investment property to 85% of the appraised value...6 months after purchase. The property "appreciated" 22%.. Things that make you go "hmmmm".

Sounds weird that these could get done. Sounds even stranger that when these loans were available there was always another lender out there that was going to go one better than the competition. Countrywide's reps would say, " send it and we will get it done ", and they did. WaMu and their subprime side Long Beach Mortgage took the cake though. I don't WaMu ever saw a loan they couldn't sell. All of us in Real Estate were drinking from the fire hose. Now we get to share a garden hose.

Rates .. up, up and away!

Off we go! As predicited by many ( me included ) rates have begun their run up after the Fed has now exited the MBS market. In November of 2008 when the program was announced 30 year interest rates dropped 1% in a day. While rates didn't jump back up 1% on Wednesday when the program ended there had been indications that they would move up.

Now after 18 months of rates at or below 5% all of us wroking with residential buyers now get to be grief counselors when a borrower hears that they won't be getting the same rate as their neighbor who purchased or refinanced recently. If a borrower didn't lock their rate last Monday it's too late.

I expect that we will see an upward trend to somewhere in the 5.5% to 5.75% range over the next week or so. Already in the last 10 days the 10 year treasury is up .306% and climbing. Rememebr while the 10 year is not the only marker for 30 year mortgage rates it is one that allows for a "quick and dirty" check of where rates could be going.

Price vs Rate---Focusing on the right aspect

Where will home prices go in the future? In most markets in the US it is unlikely we will see any more radical deterioration in home prices. Data suggests flat or slighlty rising home prices on a natioanal scope with some markets going up and fewer going down.

I would suggest that a more important question to be asked is: Where will rates go? And that's really easy to answer...up. Rate increases will have a bigger effect on a buyer's ability to afford a home ( or not ) than where prices will go. So as we talk to potential buyers about what the future holds I will almost always focus on rates.

Why? For one simple reason. In order to offset an increase of 1% in an interest rate on a 30 year term loan a borrower's loan amount would have to drop by approximately 10% to keep the same approximate principle and interest payment. For almost every borrower,  payment, not the price is the major determinant in what to pay for a home. When I talk to borrowers they don't ask me what they should pay for a home they ask what payment the payment will be. Are they shopping price or rate?

Tax Time Advice--Watch those deductions

Well not exactly tax advice but a caution on how taking deductions can limit your ability to borrow later on.

As most self employed folks know conventional lending can be a challenge. Taking all the deductions you are allowed tends to limit your borrowing ability. Even though someone can be bringing in literally hundereds of thaousands of dollars a year if they follow the rules they can avoid paying taxes on that income. The issue is that these deductions are a "hit" to the borrower's income in an underwriter's eye. The solution is to limit your use of deductions ( yes pay the damn taxes, it's a quality problem to have ) so as to not box yourself out of the ability to borrow down the road.


For those that are W2 employees there is a tax deduction trap that many don't know about, 2106 unreimbursed employee expenses. Any of these deductions are looked at just like an ongoing debt obligation like a car payment, student loan or credit card payment. These can be a killer for a potential borrwer because they don't expect it to be a hit to income. As an example, I had a borrower take 43,000 miles in unreimbursed expenses at .55 a mile. The effect on the tax return was no doubt a positive one, Uncle Sam gave the borrower back every dime that had been taken in withholding. But...the underwriter hit them for $1182 a month for the "ongoing" obligation basically wiping out 1/2 of the income to qualify for a loan. Yes the underwriter gave back .22 a mile in their analysis but it was too great an obstacle to overcome.

The tax time advice?  You should be talking to your mortgage professional about the implications of taking ALL of your allowed deductions BEFORE you file. Once the IRS has your information it is set in stone.

Rates are going up, who cares?

As anticipated the Fed announced this last week that the facility used to purchase mortgage backed securities will be wound down at the end of this month. This along with a couple of other "manipulators" has kept rates in the 5% range since late November 2008.



Advice to potential buyers and refinancers, get em while they are hot or expect rates in the high 5%'s or low 6%'s. Not that I would suggest a potential client buy a home or refinance just because of a particular rate. I am not a mouthpiece for the National Association of Realtors and I don't believe anytime is a good time to buy a home.



The conversation that every potential borrower should have with themselves is the one that cannot be based on any perceived sense of the state of the market. A borrower's metrics should be based on their personal situation:

Can my household budget handle the potential costs of maintaining a home beyond the mortgage payment? After all, not being a renter means you pay for the water heater that goes out on Christmas eve.

Am I buying the home to live in or as an investment? If you are going to live in it then I would challenge the theory that it is an investment that will offer you any rate of return over a short period of time that could be perceived as investment grade.

Does the use of the tax credit make sense to my situation? It may surprise some to learn that a few borrowers look at getting $8000 in exchange for a $200,000 mortgage as a bad idea. Can't say I have very many arguments against that.



Those of us older than 30 know that rates now are historically low. Even at 6% or 6.5% they would still be classified the same. I would expect if rates were to spike in the next few weeks the pool of potential borrowers will dry up. At least until they reset their expectations of where rates are. At which point, they will come back.

HVCC--A bad idea who's time has come, to go away

The first month of the new HVCC appraisal rules have certainly been entertaining. A petition is circulating, http://www.hvccpetition.com/ . Everyone in Real Estate should sign this even if you think the new rules are a good idea, that means you Mr. Cuomo because this thing is FUBAR. Here's some of the text ( not of my own making ) from an email I received and forwarded to my sphere of influence last Friday:

This is NOT an Appraisal problem, it's an APPRAISER issue. Regulating the entire industry at a higher cost to the consumer is not a better answer than dealing with the "Few" appraisers or lenders who are not ethical and/or following the current rules. HVCC has created an environment where inexperienced appraisers are completing substandard work with a middle man (AMC's) adding no value to the process. The entire HVCC process results in poor service, poor appraisals and slower turn times for the consumer.


It was a long email but it had some great points. One in particular, the "system" doesn't work, period. If a lender is relying on an AMC then they are continuing the problem. A broker I used to work for said today his appraiser is still getting orders demanding a specific value or the deal won't "work". Exactly the thing that was supposed to be stopped.

All of us are now dealing with long order times, flat out rejection of orders, or having reports generated by an appraiser from out of the area. This last issue is especially troubling because of a value is being established by someone that is unfamiliar with the market. This isn't a new problem, it was happening before. It's just magnified by the restrictions in the new rules.

Appraisers coming from scores of miles away where they likely don't have access to the MLS system to determine sold values. And even if they do have access to the local MLS an out of town appraiser won't have an understanding of the subject property's market. The appraiser in closest proximity to the subject property is supposed to get the order. But if a lender doesn't have an appraiser in their system that is located in the same town as the subject home then an out of towner gets the work. Agents love getting phone calls from out of town appraisers. Go ahead ask one about that, it will be a lively conversation.

No doubt there was abuse, collusion and other nasty things going on before. Thanks to WAMU, Countrywide and their respective wholly owned appraisal companies for making every one's life a little more difficult than it should be. If it wasn't for these two (now extinct) company's abuses Loan Officers would still be able to manage one of the most important parts of a transaction. HVCC has outlawed communication between loan officer and appraiser. Sign the petition, write your congressional representative. HVCC is a knee jerk reaction.

Tax Credit as a down payment part 5...FHA Get's a Clue

The way the roll out of how HUD was going to allow the use of the tax credit as a down payment prompted me to joke that Gilligan was going to be the next Secretary of HUD and The Skipper would be put at the helm of FHA. While I still maintain that HUD is a dysfunctional bureaucracy it is refreshing to see that someone(s) in there realized that a free for all use of these funds was not a good idea.

Here's the link to HUD's website, read the mortgagee letter for yourself, you will see that this alleged final version is quite a distance from Sec. Donavan's announcement to the NAR a couple of weeks ago; http://www.hud.gov/offices/adm/hudclips/letters/mortgagee/files/09-15ml.doc .

News media and other bloggers, me included, are all over this announcement. I want to thank Dan Allen ( http://theallenteam.yourkwagent.com/ ) at Keller Williams Mid Willamette for the tip early Friday morning on this.

The one thing that everyone needs to know is that the borrower will still need to come to the table with the minimum 3.5% down. This credit cannot be used to get a borrower to 100% financing, oh thank goodness. There are a specific set of conditions that need to be followed in connection with this credit. In order to make these funds available at the close of escrow the tax credit has to be monetized. So the borrower will need to take out a second lien or "sell" their tax credit in order to use the funds.

So who is going to carry the second lien? Who can a borrower sell their credit to to get at this money? Good questions, that don't have answers yet, these are certainly not addressed in the mortgagee letter. All the policy announcement states are the conditions under which it can be done. It's these two questions that will determine how long it will be before this is actually implemented by lenders...my guess, 4 to 6 weeks before lenders get this all figured out.

One other item to note. Just because this policy is out doesn't mean every non profit, governmental agency or lender has to participate. And, although 17 states have or are working on implementing this doesn't mean the other 33 states will. Neighborhood Housing entities run by municipalities and established non profits will be the only source of accurate information on this that I would rely on. For now, watch for the scammers there is plenty of money to be made off of people that won't understand what this policy is all about. The usual suspects in my market area ( LOs that have already marketed this, you know who you are ) are making this sound like it needs to be done today. As in Part 1 of this series, I say wait for it. You won't be disappointed.

Appraisals, Appraisal Reviews and the New World Order of Closing a Deal

Several closed loans and many conversations with RE agents got me to thinking ( Thanks specifically to Ric Vega, http://ricvega.com/ and Don Bartley at Keller Williams Mid Willamette) about how most buyers have dealt with the issue of appraised value in a RE deal. In the past, borrowers of mine have followed the same pattern: 1, gets an offer accepted, 2, has "x" number of days to complete inspections, 3, negotiates any issue(s) that come up and then, 4, orders the appraisal. The logic was, why spend money on an appraisal if the deal was going to die because the house was a piece of crap. Appraisal gets done, value is at, above or just a wee under sales price...done, buyer has a new home.

Fast forward to 2009. Lenders are bashing on the one last thing that is available, the collateral. In order to be able to sell loans on the secondary market ( or even have the option to at a later time ) lenders must be able to say with more surety than ever that the loans they are doing will not go bad. The pressure on lenders to do their due diligence on a loan is more extreme than many may realize. This is nothing as obvious as qualifying a borrower on income, assets and credit history. Those restrictions, while frustrating to all those who participated in a deal facilitated by a stated income loan in the past, are going to be nothing compared to this. I would suggest we all come to grips really, really soon with the terms "Insufficient Collateral" or "Reduced Value".

Examples? Sure; a re finance client from another lender with 800 FICO scores, a 9% debt to income ratio and 85 months of payment reserves denied on a 50% loan to value transaction. This is what was known as a "make sense" deal. Not any more. A comment by the borrower was, " They wouldn't do a loan for me because they said they wouldn't be able to sell my property when they foreclosed on us. We are never going to miss payment!" A value reduced 15% by a review appraiser from the original value. Used 2 of the same comps but reduced the value of the subject by $5000 because it had a less superior view, both properties are in a residential neighborhood. Did the comp have a view of the neighbor ladies changing room? That could be construed as a superior view by some, but I don't know that it's worth 5 grand.

From my perspective we are seeing another manipulation of values. One that may do more harm than good. The first one, the restrictions on borrower credit, was in reality a very reasonable step to take. But now we are seeing the restriction of credit based on automated criteria in computer models for the valuation of a subject property. The use of Automated Valuation Models is the primary determinant if an appraised value will be subject to additional review. All by itself this has the potential to drive values even farther down than they would fall as a result of normal market forces. It's another vicious cycle that could kill a lot of deals late in the game. The issue will now be that sales transactions will be more likely to fail due to appraisal issues rather than inspection ones.

The reliance on AVMs is understandable, on the surface anyway. Taking the human element out of the valuation process removes any possibility of fraud or other nasty bad things that could happen. These systems are likely to be very robust in their analysis. After all, automated underwriting systems have made all approved loans non defaultable, right? But as with all computer models, garbage in, garbage out. In states where sales prices do not have to be recorded accurately ( or at all ) the quality of the information is at best suspect. Yet, lenders AND investors in mortgages rely on AVMs to quantify the risk associated with a particular property's value. I have argued, successfully and unsuccessfully against their use. For now, the battle continues.

My solution is to suggest the reversal in the order of inspection / appraisal regimen. The borrower should order the appraisal first, see if any value issues arise that may cause them to renegotiate or walk away from their contract, then order the inspection. After all, the appraiser will note any grossly obvious defects in the home that the inspection will no doubt flesh out. For the seller, well you guys are pretty well hosed right now, whether you think so or not. May as well get the really bad stuff out of the way early. Any seller that thinks they can dig their heals in on "their" price better take a look around and have their listing agent to give it to them straight. The first offer you get will be the best and highest one you will get, better take it and hope the borrower's lender doesn't come in and make your listing agent's CMA look like doody.

Tax Credit as a down payment part 4...An alternative announcement from HUD

The same reporter from the Arizona Republic that was the source for my post on Tuesday has updated his article! Not really sure how the guy was able to publish an article that wasn't fact checked by his editor before it was published is a different subject altogether.

What a load. If HUD can't even manage the announcements relating to this fairly significant policy change how can we expect that the entire thing will actually be thought through. Mortgagee Letter 09-15 should have never been released.

Maybe this could be used as an alternative announcement:

Attention all first time home buyers..
We, at HUD, really want to help you out when you buy your first home. We really, really do. In an effort to stimulate the housing market, despite the consequences, we have decided to bow to all the lobbying efforts of the home builders and the NAR.
Starting June 1, 2009 all you need to do is call us at 1-800-GET- CASH. Tell us why you think we should send you tax payer money and you will get a check, it's that easy.
We figure we have lost so much money already a few extra billion won't be too hard to explain. Of course, if you would like to make a donation to our cause please call 1-800-VACUUM. We accept donations in all currencies except US $'s.

I completely understand the motivation for the first and second versions of the 1st time buyer's credits. From my perspective it has gone as advertised. Personally, I have seen more interest from 1st timers since late 2008 than I had in the past 4 years in the business. I don't specifically market to that segment, so for me to have an uptick says that it was working.

As it is right now the program makes sense. Put a little skin in the game now, get a nice little nut from Uncle Sam next April. It is an established fact, when people put their own money into a deal they are less likely to default on a loan. Did I mention that the existing program works?

The housing market is still experiencing pain, OK mostly the sellers. It is called a business cycle for a reason, we cycle up AND down. I am really confused why there are attempts to bring the market back to a place that is even in the vicinity of where we were a year and a half ago. There are a number of people suffering from the effects of it now.

Simply put what we have going on now is an effort to manipulate the RE market by HUD. I don't think we need it.

Bye Bye Tax credit Down Payment..Sanity Rules at FHA?

Under the heading of something that was too good to be true:


Tax credit ineligible for down payment

Feds reverse rule to assist first-time home buyers
by J. Craig Anderson - May. 19, 2009 12:00 AM The Arizona Republic


Federal officials on Monday reversed an earlier decision to allow first-time home buyers to use an $8,000 tax credit to borrow the down payment on a home.
A week earlier, U.S. Department of Housing and Urban Development Secretary Shaun Donovan had told the National Association of Home Builders that HUD would let banks and local governments offer short-term "bridge loans" to cover the down payment for first-time buyers eligible for the tax credit. The loans would have been available to applicants for federally insured mortgages such as Federal Housing Administration loans.
Lenders, home builders and real- estate agents had reacted favorably to the bridge-loan proposal, saying it would open up the housing market to more first-time buyers.
However, not everyone was in favor of using the tax credit as collateral on a down-payment loan.
"That tax credit should be savings, not debt," said Patricia Garcia-Duarte, executive director of Neighborhood Housing Services in Phoenix.
Garcia-Duarte said the proposal too closely resembled a now-illegal practice known as seller-funded down-payment assistance, which allowed a home's seller to "gift" the down payment to a specific buyer through a non-profit organization.
The loans also could have created income-tax issues, according to the IRS officials who shot down HUD's plan.

Well, well what a surprise! At least there are some sane decisions being made at FHA. So let's recap who wanted this..

Builders....check! Gotta get rid of that pesky inventory that is costing them interest payments every month
RE Agents..check! Gotta get after those first timers 'cause nobody else is even looking in some markets.
Lenders.. how about we change that to LOs looking to make a score. Some that still haven't figured out how to do a loan that isn't stated. Certainly not this one and many others that actually thought this through ( see my post from last week). I redacted part of the post that announced this. There is a quote from an LO that pointed out what I have, it was a bad idea, a very bad idea.

Bridge loan, too funny. First timers are the least educated group of buyers out there and most often need to be walked through the whole process. Not only does the whole process of buying a home look like smoke and mirrors, the lending side can put them down for the count if they don't have someone looking out for their interests.Throw something like this at them and we were headed for disaster.

The whole situation now kind of reminds me of a scene in the first Naked Gun movie. "Move along, there's nothing to see here people. "

Well that didn't take long! Document for FHA down payment removed

HUD "Pulls" Mortgagee Letter on Tax Credit

The Letter 09-15, the document that addressed the use of the tax credit as a down payment for FHA loans has been pulled from HUD.gov.

Maybe it doesn't mean anything but the guideline brief that had been posted on HUD.gov is no longer available.

Looks like my advice from today's earlier post was fairly accurate. Wait and see what comes of the new policy.

First Time Homebuyer Credit as a Down Payment..Uncle Sam to RE's rescue

Here's the latest assist from the Federal Government for the real estate market.:



US Department of Housing and Urban Development secretary Shaun Donovan made the announcement yesterday. Donovan’s announcement came at a National Association of Realtors legislative summit, although HUD’s details on the initiative aren’t scheduled for official release until next week. The initiative will allow FHA-approved lenders to monetize the tax credit through short-term bridge loans, letting borrowers access the funds at the closing table.



OK, this sounds really awesome. The web is filled with the expected amount of hyporama on this development. There are no official releases until next week from HUD. What will likely follow is another 2 to 4 week period for all the lenders to figure out how to implement the new policy. I will say it again, there are no official releases until next week.



I have, and anyone in RE, should have some questions and concerns on this new policy. I am not suggesting I am against it, after all I work for a FHA approved lender, but let's take a look at some potential issues that come to mind.




Will a lien be placed on the property at close of escrow? Will it be an IRS lien ( it is a TAX credit ) or will it be a FHA lien similar to ones we see from community non profits that provide buyers credits?



How will the bridge loan be repaid? If all goes well the borrower will have the full credit coming back to them when they do their taxes for 2009. But what happens if the borrower ends up owing taxes? Will the IRS place a lien on the borrower and/or property? Lenders don't like IRS liens, either do title companies.



Is the bridge loan payable in full in the next tax cycle? Or can it be paid back over time like the original $7500 tax credit?



Is it a lien that stays on the property until it is sold?



For the government conspiracy theorists; If the government has a lien on my house can they tell me what I can or can't do to the home?



Agents, better get your addenda forms out 'cause you will be using them. Is the use of the credit determined by the date of the contract for purchase or the potential funding date? I'll bet there will be a shipload of contract extensions done in the next few days.



Questions, lot's of them are not listed here.



So the hype is upon us. But what the hell, who cares about the ramifications, let's just go out and mine our databases for first time home buyers ( like we weren't already! ). I took 15 phone calls on this in the first hour and 15 minutes in the office this morning. I say let's chill out for a bit and get our bearings.



I am contacting my first timers with one piece of advice. Don't do anything, yet. Just like all the other changes we have seen mandated by new government programs in the last few months this not a policy that will be implemented overnight. What I am telling them is the the same advice I give to all buyers, first timers or no.

1) Get your financials together ( 2-2-2 Rule, 2 months pay stubs, 2 months bank statements, 2 years tax returns )

2) Make an appointment with your favorite lender.

3) have them pre approve you in either FNMA's DU or FHLMC's LP.

4) Wait for everything to come out in the wash.



There will be no prize for being the first one to do this. What I will say is don't wait until October to do this. Unless the rules change this credit goes away December 1. If you don't close by November 30 you will have missed the boat.

100% Loans for Everyone...Not so fast Mister

Even in today's environment we can still find Loan Officers pitching the miracle of no money down loan programs. In some cases they are assisted by a Title/Escrow company or a Realtor in putting together a "class" on how to take advantage of these programs. There are 100% LTV programs but these loans are not for everyone. So why pitch these programs? Let's call a spade a spade. Those touting these loans are really only on a big fishing expedition for potential buyers. Some that probably shouldn't be buying in the first place.

So what is really left out there for a borrower with no money of their own? 2 programs..VA and USDA Rural Housing. For everyone? Not exactly. As I have noted to some, these 2 programs are for specific subsets of all potential borrowers.

VA? Gotta be a vet or a qualifying widow of one. USDA? Can't make too much money and you must buy a home either in the country or in a town of less than 20,000 people. On top of those entry requirements the debt to income ( DTI ) restrictions are such that not even all the potential qualifiers are eligible. The VA makes sure the vet can not only afford the house payment but the utilities and food and clothing for the family. USDA has DTI restrictions as well. No wonder these programs have the lowest default rates of any loan programs..ever.

RE agents love any loan that can get a buyer into a home. Title and Escrow companies do too. The reason is simple, close a deal..get paid. To be fair a loan officer's mentality is pretty much the same. We don't get paid until a deal is closed either. The issue is that we as loan officers have an ethical, fiduciary responsibility to the borrower that far exceeds any that an RE agent has.

The loan officer is the only person in a position to inform the borrower of their choices AND the consequences of them. We have a responsibility to say, "wait a minute, is this really what you want to do?" We are the only ones that have a complete understanding of a borrower's financial state. We are the ones that know what they can truly afford. We are the ones that, if we are asking the questions we are supposed to, know how their household budget stands. We are the guardians of their financial future.

So why do I have a problem with pitching 100% loan programs to everyone? Because it puts a borrower into a position where emotion ( the desire to have the American dream ) can override logic. Who doesn't want to own a home? But it is an established fact that borrowers that don't have their own skin into the game are more likely to default on a loan. Need an example? One of the reasons that FHA no longer allows a seller to "contribute" ( through a sham of convolution using "non profit" entities ) the buyers down payment any longer is because borrowers using seller contributed down payment defaulted on their loans 3 1/2 times more frequently than borrowers with their own funds...nuff said.

So the question is, do we as an industry continue along the path that got us where we are today, giving anyone that wanted to buy a loan? Or do we have enough guts to say to a potential buyer, "maybe you should wait" or "let's look at something more reasonably priced for you"?

I know where I stand. I would prefer to advise a client to wait if it is appropriate for their situation. What do you think?

The Bloggers on the left side of the Page

In an effort to fill space and provide a little insight I thought I would share what I like about the blogs and websites I have posted for recommended reading.

Calculated Risk - http://www.calculatedriskblog.com/Once two contributors, now one due to the passing of Tanta. She would have been someone I would have loved to meet in person. Th's blog is a awesome catch all for all things geeky in the financial sector. Great graphs and very easy to understand explanations of banking and finance. Usually updated multiple times a day.

Truth about Mortgage.com -http://www.thetruthaboutmortgage.com/ Short posts on the "topics" of the moment as the author sees fit. This site has been a site I look to for precise and condensed versions of longer articles in other publications. More times than I can count articles from this site have led me on wonderful searches to other sites and traditional news sources. Plus every story has a pic, bonus.

Market Ticker - http://market-ticker.denninger.net/ Karl Denniger was one of my early blog heroes, still is. Unfortunately he has definitely moved on from his original raison d'etre. That of giving readers insight into his very brilliant mind on the trading of options to one that is definitely more political. He definitely will call out less than intelligent congressmen and politicians. Don't agree with about 70% of the stuff he says but I still respect his opinion. His website has a traders forum that is never boring.

Paul Krugman - http://krugman.blogs.nytimes.com/ New York Times columnist, Econmist, Nobel Prize Winner. "Nuff said. To my recollection he has not been wrong about what has happened to our economy, yet. Not that I would put Karl Denniger and Mr. Krugman in the same club but they do offer a nice counter to each others opinions.