The One Year Anniversary of the "Credit Crisis"

In August of 2007 we knew that changes were occurring in the mortgage industry. What we didn't know was that while the owners of our company were on vacation, various investors and lenders would simply stop funding approved, ready to go loans. Leaving us here to desperately try to explain to people why suddenly they actually weren't buying or refinancing a home after all.

Like any good employee would do, we called the owners and whined, "Everyone is mad at us, what should we do?"

And like anyone with thirty years of experience in the field, on vacation with their family, would respond they said, "Everything will be fine."

The combination of perspective and Disneyland has an unbeatably calming effect, evidently.

And alas, they were right, as one year later we're all here to tell the tale, though it's still unclear if the worst is over.

Here is an interesting article about the beginning of the end of the mortgage world as we'd known it for several years.

And here is a terrific analysis of the various financial sectors that have been affected and the invasive steps the government has made (and is poised to make) in order to stave off a recession.

Sphere: Related Content

New Tax Incentive for First-Time Home Buyers

The Housing and Economic Recovery Act of 2008 authorizes a $7,500 tax credit for qualified first-time home buyers. To qualify for the credit, a home must be purchased between April 9, 2008 and before July 1, 2009, and buyers must meet income restrictions. This tax credit combined with still relatively-low interest rates and house prices at a 5-year low make now a great time to enter the real estate market for the first time!

Sphere: Related Content

Tightened Restrictions and Rising Interest Rates

In light of all of the problems being had by Fannie Mae and Freddie Mac, interest rates have risen rapidly in a relatively short period of time. Just last winter 5.375% was the going rate for a 30 year fixed loan and this week -- 6.75%. In the past interest rates have been in the double digits, so there isn't a lot to complain about yet, but I suspect a lot of people are wondering why they didn't refinance when they had the chance.

In other industry news Fannie Mae has changed its guidelines in order to prevent intentional foreclosures. You've probably already heard that guidelines have tightened so that anyone who has had a foreclosure in the previous five years will not be eligible for conventional financing. So some people have been tricking the lender.

What they do is they purchase a new home stating they will live in the new home and rent out the current home. This helps people qualify because it's more difficult to purchase a rental property, but it used to be relatively easy to convert an existing home into a rental. You could use the proposed rent on your current home to offset the mortgage payment and thereby more easily qualify for the new loan.

So what people were doing is buying the new cheaper, more affordable home under those guidelines and then once the new loan closed, simply walking away from the other house. As a result, you can forget about converting an existing house into a rental with ease (which used to be a great way to slowly build up a real estate portfolio - because you could buy each new house with a mimimal down payment and owner-occupied interest rate), because now everyone will have to both provide a rental agreement (meaning you'll have to rent your house out before you own the new house you'll be moving into) and also you'll have to be able to qualify with both payments.

I'm not as pessimistic as some of the news about FNMA/FHLMC -- they're government agencies and as you know the government takes care of its own (and big corporations), so most likely it's only a matter of time and this will change again.

Sphere: Related Content

Analysts See a Housing Market Rebound

According to this article, due to the combination of fewer new houses being built with an increase in the number of buyers who can afford to buy one (lower prices = greater affordability), within three years we should see a bounce back of the housing market. Lower prices create greater demand which creates higher prices. Good ol' supply & demand - never fails.

On the other hand interest rates are steadily increasing (up to about 6.25% for a 30 year fixed today) and if that continues, this forecast might be a bit optimistic. (So as to not lose perspective, rates were 6.125% a couple of years ago - we just had a nice dip this past winter.) As federal attention shifts to bringing down the price of oil, the bond market could continue to suffer and who knows how high rates will go. The increase in rates could offset the attractiveness of home ownership for buyers in certain areas so we'll see how things go.

In the meantime, here is an interesting analysis of what has been happening in Portland's market. We haven't suffered as badly as some, with any luck we'll snap out of it sooner too!

Sphere: Related Content

The "Walk Away" Myth

Maybe you’ve heard about the disturbing new “trend” of people who can afford to pay their mortgages just walking away from their homes that have declined in value. As it turns out, it’s a whole lot of nothing.

The vast majority of people who are giving homes back to the bank were investors and/or speculators to begin with, and often they had been involved in fraudulent transactions. The others are the homeowners who are losing their houses because they can no longer afford the payments due to ARM adjustments (in some cases they had been involved in fraudulent transactions as well).

As this article points out, historically (as well as currently, according to actual facts) people will do just about anything to keep their homes – certainly they don’t destroy their credit and become renters (or homeless) just because of an unfortunate blip in market values.

Sphere: Related Content

PMI Revises Distressed Housing Market List

Effective June 1st PMI, a major mortgage insurance company, has added to its list of distressed housing market areas. They have also divided them into "Level 1" and "Level 2" segments. Given that the options for obtaining combination first/second mortgages to avoid large down payments have all but disappeared, how much mortgage insurance companies are willing to insure is becoming increasingly important for those seeking to purchase or refinance with minimal down payment/equity.

Areas listed under Level 1 are eligible for mortgage insurance up to a 95% loan-to-value ratio.

"Level 1 is for those... areas where we anticipate the downturn to be less severe based on underlying fundamentals, including unemployment trends, home price volatility, etc."

Areas listed under Level 2 are eligible for mortgage insurance once the loan-to-value has been REDUCED by 5% of the maximum allowable for the particular loan program being used. And in any event, the loan-to-value cannot exceed 90%.

"Level 2 is for those... areas that are projected to continue to experience more significant economic and/or housing downturns and are expected to take longer to improve."

Oregon and Washington state are not largely affected by this yet, with one exception. Bend, Oregon is on the Level 2 list. So however bleak it looks to the average person driving around Portland seeing "For Sale" signs on seemingly every third house, PMI doesn't think we have it so bad -- we'll see how it goes over the next several months.

Sphere: Related Content

New-Home Sales Rose in April

A surprising market statistic was released for April: New-home sales rose 3.3%

For the short-term, this isn't necessarilly good news. The housing market is still in a slump and perhaps we haven't seen the worst of it yet, but there are some glimmers of hope:

One bright spot is that inventories decreased. The supply of homes at the current sales rate dropped to 10.6 months' worth from 11.1 months in March. The number of homes completed and waiting to be sold decreased to 181,000, the fewest since July.

Purchases rose in three of four regions, led by a 42 percent jump in the Northeast. They increased 8.3 percent in the West and 5.8 percent in the Midwest. Purchases dropped 2.4 percent in the South.

Sales of previously owned homes, which account for about 85 percent of the market, fell 1 percent in April, and the supply of unsold properties reached a record, the National Association of Realtors said last week.

New-home purchases, which make up the remaining 15 percent of the market, are considered a timelier indicator because they are based on contract signings. Resales are calculated when a contract closes, usually a month or two later.

Sphere: Related Content

The Positive Fallout of the SubPrime Mortgage Crisis

The mortgage industry has been much maligned lately - partly deserved due to predatory and fraudulent loan practices committed by some. At the same time, the mortgage industry is a cornerstone of democracy, as without it, only wealthy people would be able to purchase property and build personal wealth from little to nothing.

The Federal Reserve has been criticized for not properly regulating in time to prevent such a widespread crisis as we find ourselves in today -- the result of unscrupulous lending practices. Therefore, Ben Bernanke and others initiated a proposal for some hefty regulations of the credit card industry. The credit card industry, like the SubPrime Mortgage industry, often preys upon the poor -- the one difference being, of course, that during "regular" economic times, mortgages help people increase their net worth and credit cards help them DECREASE it.

So while I wouldn't morally equate the two, if the mortgage crisis leads to increased responsibility on the part of credit card lenders, then that's one good thing about all of this.

Some of the things being considered are requiring a grace period before the payment is considered late, prohibiting the application of payments to the lowest-interest balance first and raising interest rates on existing balances.

Sphere: Related Content

Another Take on "Location Location Location"

Richard Florida's newest book offers an analysis of housing markets and suggests that (perhaps not today, but in the near future) Portland's real estate forecast is sound.

A local Real Estate Agent wrote an interesting review of it. I especially enjoyed his take on the book because he included one of my favorite sayings -- "the only two things that people don't like to buy on sale are real estate and stocks." Particularly relevant in this market given that the population of Portland is expected to increase by about a million people over the next decade.

Sphere: Related Content

Mortgage Loan Calculator

With the majority of economists now speculating that rates will either go up or perhaps stay the same for the foreseeable future, anyone who has been thinking about refinancing will probably want to look into it now. We're not expert economists here, but rates have increased a little bit every day since Bernanke lowered the discount rate last week. Below is a calculator to help you determine if a refinance is a good idea for you.

Also, for potential homebuyers, this will give you an idea of what you can afford. Be sure to use the "mortgage" function rather than "loan" function so you'll have the most accurate total payment including property taxes and homeowners' insurance.

Posted by All Pacific Mortgage at 12:22 PM 6 comments  

Excitement Aside, Mortgage Rates May Not Decrease

Charles Schwab published an article that gives a nice clear break down of the reasons why we can’t bank on long-term mortgage interest rates decreasing further. They’re still low, historically speaking (about 6%), but they have actually increased over the past month or so compared to what they’ve been the past several months, (about 5.5%) even in the wake of all of the Fed discount rate cuts and the inflation scare.

Equity Line rates have decreased dramatically over the past year because they follow the Prime rate which is now down to 6%. Other adjustable rates seem like they should be nice and low too, given the performance of the bond markets they follow, but investors are weary from adjustable loan default rates and aren’t particularly eager to buy any more of them. So more often than not, these days the 3/1 and 5/1 ARMS (fixed for 3 and 5 years respectively) are more expensive, or at least as expensive as the 30-year fixed rate.

The 5/1 ARM used to be a popular mortgage both because the rate was slightly below the 30-year fixed and the majority of home buyers don’t expect to own the same home for longer than five years. In contrast to what happened with SubPrime loans (in which case people had low initial fixed rates that increased so high after the second year that they could no longer afford their mortgage payment), people who have existing Prime adjustable loans are probably happy to find their rates decreasing. Which makes it tempting not to refinance into a fixed rate – but when rates increase all around, those annual adjustments won’t be so pleasant.

Sphere: Related Content

Lake Oswego Real Estate News

The Lake Oswego Review reported some interesting data on Lake Oswego's real estate market last week. According to this analysis property values are increasing even if potential home buyers and sellers are exercising caution due to the national news.

One source of confusion in this article is a local realtor states that lenders are more restrictive (which is true) and that "down payments are more in the 25 to 30 percent range."

I'm trying to think if I've ever seen a buyer who had 25 to 30 percent to put down on a house. Maybe once or twice over the past 15 years. Anyway, that statement just is not true.

Three to five percent down (depending on how expensive the house is) is becoming the norm now -- so would-be homebuyers don't need to panic. The vast majority of "tightening up" has been the elimination of Zero-down loans and Stated-Income loans.

Sphere: Related Content

Your Home Equity Line Might Vanish

Last month we received a memo suggesting we inform our clients that many lenders were poised to freeze their HELOCS. So in our monthly newsletter we let everyone know that if they know they’ll need the money from their Home Equity Lines they might want to take it out now and put it into an interest-bearing account. But before we could even get the newsletters in the mail, I received a letter from my bank. My HELOC has not been frozen, but the maximum line has been decreased based on the bank’s belief that houses have decreased in value, generally speaking. So now I know firsthand – it’s happening. The bank told me I could pay for an appraisal to be done by THEIR appraiser if I wanted to dispute it, but I know that will likely prove to be wasted effort, time and money.

I’m not overly alarmed by it. According to Freddie Mac’s chief economist’s report the housing market probably won’t improve as a whole until 2010. In our favor, we are still experiencing job growth in Oregon at this point which offers hope in terms of recovery. But it’s a good time to create a short term budget if you were planning to leverage the equity in your home over the next few years. Here’s a very thorough and easy to navigate budget created by Dave Ramsey if you need help there.

Sphere: Related Content

Who Benefits From a Housing Slump

MSN Real Estate writes this week about the other side of the housing slump equation. We all feel badly for those who are losing their homes, but not everyone is in such a gloomy predicament. On the other side of a person desperate to sell a house is always a buyer ready to snag a great deal.

Living in the Pacific Northwest, I can’t help but be a little bit envious of some of the people in this article. Getting a house for $50,000? Wouldn’t happen to me, unfortunately. Because we live in an expensive housing market to begin with, it’s not as easy to find the cash to put down, qualify for the payment or rent something out for at least as much as the payment in Oregon as it is in some other markets. (On the positive side, I suppose, it’s not as difficult to do that here as it is in, say, San Francisco.)

But there are still a lot of good deals to be found here – relatively speaking. And if the economists are right, the bargains will only increase over the next year.

Sphere: Related Content

How Did We Get Into Such a Big Mess Anyway?

This week David Leonhardt wrote a really excellent explanation of how the relatively miniscule segment of the mortgage industry known as sub-prime lending has managed to turn our entire economy on its ear.

“It really started in 1998, when large numbers of people decided that real estate, which still hadn’t recovered from the early 1990s slump, had become a bargain. At the same time, Wall Street was making it easier for buyers to get loans. It was transforming the mortgage business from a local one, centered around banks, to a global one, in which investors from almost anywhere could pool money to lend.”

Of course we all know what happened next. Too many people received too many loans that they couldn’t repay. Which leaves us in our current dilemma:

“So firms are now hoarding cash instead of lending it, until they understand how bad the housing crash will become and how exposed to it they are.”

“The conservatism has gone so far that it’s affecting many solid would-be borrowers, which, in turn, is hurting the broader economy and aggravating Wall Streets fears.”

But fear not, there is at least one optimistic voice in the roaring den.

“The best way to overcome fear is to look at the long run. The typical homebuyer keeps a home for 10 years or more, so there is time for those who bought in 2005 and 2006 to weather the current decline in prices. Those who bought at the top are unlikely to see any windfalls from house appreciation, but they will not necessarily suffer from buyers’ remorse. Owning a home has its advantages: the deduction on mortgage interest is substantial and too much of a sacred cow to ever be repealed, and there is a certain security and satisfaction to owning your own home.”

And that’s exactly what we’ve been saying all along. When the stock market hits a blip no one comes out saying that as a rule, it’s smarter to bury your money in the back yard than to invest it. They recognize that these things rise and fall and suggest the best ways to make money or at least not lose your shirt while waiting out the downturn. The same is true for real estate. Right now is not a good time to sell if you don’t have to, but it’s a good time to buy if you can.

Sphere: Related Content

How Big is the Foreclosure Crisis?

Nothing excites the news media more than a big fat crisis. So I was surprised to read an actual honest analysis of the recent foreclosure data. If you follow the news regularly you'll probably be shocked to learn that most people are NOT, in fact, losing their homes. It's true no one is over the moon about their house's appreciation rate over the past year or two like they were in the good ol' days, but still.

This is not to minimize the stress and trauma of those who are struggling, only to point out that the collapse of western civilization is not necessarily at hand. We are in a down cycle -- it happens. It will turn around eventually.

Sphere: Related Content

Portland Still Experiencing Positive Growth

Last week the Standard & Poors/Case-Schiller Home Price Index figures indicated that three of the twenty metropolitan areas tracked experienced positive (if moderate) growth. Namely: Portland, Seattle and Charlotte.



Portland is only one of three MSAs still experiencing positive annual growth rates. Portland has been holding strong with median home prices increasing month after month. Fourth quarter 2007 saw a 1.8% increase to $290,500 from $285,400 a year prior. “We have a positive economic atmosphere in our area. The current median sold price is up, due to a greater ratio of sales on the higher end,” says Jim Homolka, President of RE/MAX Equity Group, Inc.



I don't know that this is GREAT news, but we'll take it and hope for the best.

Sphere: Related Content

Just When You Think it's Safe...

Right after I explained all of the zero-down financing options available to would-be homebuyers last week, I was greeted Monday morning by several memos from mortgage insurance companies effectively stating that conventional 100% loans are probably going the way of the dinosaur soon.

To back up, all conventional loan applicants who do not have a 20% down payment are required to have mortgage insurance. When you apply for the loan, the lender approves the loan subject to the mortgage insurance company approving your loan as well, thereby mitigating the lender’s risk.

For a while now, several markets have been listed by mortgage insurance companies as “declining.” Currently all of California, Nevada and Arizona are on that list. For a while Bend and Medford, Oregon have been on these lists too. But the latest list also includes the Portland metropolitan area (meaning Clark County, Washington as well). Seattle is still hanging tough (though Tacoma is on some lists).

But just to keep things confusing, every mortgage insurance company puts out its own list, and Portland isn’t on all of them. Neither is Bend or Medford. (Sorry to those it affects, but NV, CA and AZ are on all of them.)

The purpose for these lists is that mortgage insurance companies will no longer insure properties in declining markets to 100%. So as of today, we may be able to find a no-down conventional loan for someone (most lenders are still doing them, but as I said, subject to being able to insure them), but for how long depends on when the remaining mortgage insurance companies decide we’re in a declining market. Soon it might be that people will need at least a 3% down payment for conventional financing.

The good news is, HUD has thus far been unable to ban down-payment-assistance programs on FHA loans. Even better, FHA loan limits are expected to increase by as much as 30%. So I have a feeling we’re going to be doing a lot of government loans in the coming months.

Sphere: Related Content

Of Course There's No Lull in Mortgage Pitches!

Naturally everyone is concerned about the current housing and mortgage lending trends, but some people really take their concern to the extreme, as in this article Monday from the New York Times. Of course lenders and realtor associations need to be held accountable and advise responsibly, but to suggest that they shouldn’t be advertising because we’re in a down market? That’s crazy. Here are a few reasons why:

1.The real estate market is cyclical. Just because home prices might fall a little bit over the next six months doesn’t mean that thirty years from now you won’t be glad you bought a home today.

2.A lot of people already have mortgages and if you think refinancing your loan to a 5% fixed rate (like a few lucky people did a couple of weeks ago) isn’t a good idea just because Countrywide Financial is having some difficulty right now – well, you can go ahead and pay too much if you want to.

3.The sky is not falling. There’s a lot of opportunity out there and the people who work in the industry are taking advantage of it if they have the means to do so. It’s unfortunate that some people are experiencing hard times, but that they have to get rid of their house is an opportunity for the people who have the money to buy them and for the companies who have the money to refinance them into something they can afford. If you want to hide under a rock because there’s a blip in the financial market, go ahead, but that doesn’t mean you’re the smart one.

Just like stock investors switch strategies to make money in a down market, so do real estate investors. As for what regular ma and pa homeowners and would-be homeowners should do? If history is an indicator, the odds are good that the sun will continue to rise every day for the foreseeable future and that Americans will continue to want to live in houses. Home ownership is not suddenly a “bad” investment, generally speaking.

Sphere: Related Content

Listening to economists is often about as useful as listening to the weather report. The bond market didn’t respond positively yesterday to news that retail sales for January were higher than economists expected. February will be a good month for retail sales too if what we’re spending to say “I love you” today is any indication. Americans must really be feeling the pinch of this recession, eh? Unfortunately, that’s bad news for interest rates and we’ve seen increases pretty consistently.

Furthermore, everybody and their dogs are speculating about what will happen in Oregon when the new Fannie Mae loan limits go into effect. So far I’ve heard that Bend and Medford will increase to $430,000 and $425,000 respectively, but nothing on the Portland area. From another source, Oregon isn’t expected to raise limits at all, anywhere. As always, we’ll have to wait and see how it goes. The loan limits are calculated based on median home prices for each area, and in the Portland area we might already be where we need to be.

In other news the Oregon legislature is considering a mortgage reform bill – similar to the one that didn’t pass last year. Most of the line items are pretty straight forward (and for many are standard practice, but need to be legislated for the unscrupulous few) and some of the proposed items are already in place. For instance, brokers already have to disclose their yield spread premiums. But one thing that stands out is the line requiring lenders to verify the income and assets of every borrower – which means no more stated income loans. And there are instances when self-employed people really do have enough income for the loan they’re applying for, but can’t verify it in a way that meets Fannie Mae guidelines for a variety of reasons. Many lenders have stopped doing these “stated income” loans already, but it will really be unfortunate for a lot of high quality loan applicants if they go away altogether.

Sphere: Related Content