Thursday, January 16, 2014
If you are a buyer and haven't spoken with a lender in the last few months you may be in for a surprise.... or not depending on the size of your bank account. As of January 10, 2014 the guidelines for obtaining a real estate loan changed... or at least they were supposed to change. The changes are courtesy of the Dodd-Frank Consumer Protection Bill signed in 2010 that was basically designed to curb Big Banks and get the FEDs out of the mortgage business. The thought was that if lenders didn't follow certain rules they could be sued by consumers if the loans can't be repaid.. If they do follow the rules then they have created a "safe harbor" and can't be sued if the loan goes bad. For some strange reason the government seems to think that big lenders will be more concerned about possible consumer lawsuits than making large profits using risky business practices.
In order to have a safe harbor banks/lenders must follow a few basic rules which will create a QM or qualified mortgage:
1. The borrower must be able to repay the loan... ( Really?)
2. The loan payment must be fully amortizing ( no interest only loans or balloon payments)
3. Total household debt including mortgage payments can't exceed 43% of the borrower's gross income.
4. Points and fees can't exceed 3% of the loan amount ( does not include most normal closing costs)
5. Loan term must be 30 years or less
6. Loan amount can't exceed conforming loan limits for the area ($625,500) for high cost areas)
7. All assets, income, debts etc must be documented verified in writing. ( no no doc loans)
8. Borrowers must receive copies of all appraisals.
However as with all things that are government generated there are exceptions and wording that can change the final product. There are words like presumed and good faith effort sprinkled through out the documents. Also of note there are no down payment or credit requirements which doesn't make much sense if the intent is to make a loan only to folks who can repay the mortgage.
While lenders may point to the new rules the reality is that not much has changed. for many banks and direct funding lenders. . I spoke with one representative of a major local lender and they are not seeing any huge changes in the way they are packaging loans...
The above guidelines will affect folks who are looking for a conforming loan. However borrowers who need a jumbo loan may have more leeway.... especially if the banks are going to in-house the loans. Some major lenders have programs in place for their high-net worth clients who have accounts with them that include interest only loans and other products that don't quite meet the above regulations. Wells Fargo, Citi and other big banks are still making interest only loans as well as other loans tailored to their more affluent clients. In an article from the Wall Street Journal on March 7, 2014, Al Yoon gives an accurate accounting of the reality of post Dodd-Frank.
These guidelines may also create an unintended market with hard money lenders who will make loans not meeting the guidelines at a significantly higher interest rate than available in the primary market. This may well affect many homeowners who need to refinance their current loans and don't quite fit the mold.
Also it would have been nice to set up a few guidelines for the self employed to make it slightly easier for these folks to obtain a loan. If you are self employed obtaining a loan in the last few years has been almost impossible unless you are extremely wealthy. Just because you don't get a W-2 doesn't mean you won't repay your loan.
Just to make it more interesting we see rates rising as the FEDs cut back on their purchases of MBS funds over the next few months. While I don't think the increase will be huge, even .05%-.075% in mortgage rates will have an effect on the market. Current rates are running 4.5% on jumbo conforming loans to over 5% for nonconforming jumbo loans. While rates are still at historic lows, higher rates coupled with major price increases in many markets may change options for a number of potential buyers.
Tuesday, January 14, 2014
Drive down any street in the South Bay- Beach Cities and you will see at least one property where some type of home improvement is happening. Unlike many areas in the state and country we don't have new home communities popping up each year. In fact the construction of new homes in California is well below demand. That is one of the reasons home prices are so high statewide.
While demand for homes in the Beach Cities and the South Bay in general is increasing, we just don't have the land available to build new home developments. Manhattan Beach, Hermosa, Redondo and El Segundo are built out. This means that you have to tear down an existing home to build a new one which can make the price a bit high for many buyers.
In the South Bay-Beach Cities that often means buying an older or smaller home and updating or remodeling the property. We love to upgrade and personalize our homes to make them reflect our needs. But as many buyers know and sellers find out; not all upgrades pay for themselves when a home is listed for sale.
If you are considering relocating in 5 years or less you might want to review the projects below. According to CAR there are good improvements that add value to your home when you decide to sell and improvements that you may love, but don't necessarily bring the expected return when you sell your home.
4 Home Improvement Projects that add value...
5 Home Improvements that may not return their cost..
If you install new wood cabinets, granite counters and modern flooring with mid-level appliances in a median priced home you will likely recoup most of your costs. However take that same median priced home but install new cabinets made from specialty imported hardwoods, add high end appliances, hand painted designer tiles for counters and imported flooring and you could spend 3-4 times the cost of the good kitchen remodel. When you decide to sell in a few years that designer style may no longer be in vogue and you might be lucky to recoup 25% of your costs. The same is true for the bath... we love the look of whirlpool tubs and steam heated showers but reality is that they are rarely used by folks trying to get ready for work in the morning.. A larger shower with 2 shower heads and a smaller tub might be a better choice for a lot less money.
Good resale value utilizing landscaping is another example..... Colorful flowers and well manicured yards are far more effective for resale than adding 4 exotic trees in the backyard at a cost of $3000.00 each.
As the Spring selling season approaches you might want to consider which projects will bring the most bang for your buck if selling your home is on your schedule this year.
Friday, January 10, 2014
I normally write this post on December 31... but this year a good friend was in the hospital and I just got back into town. Life is always full of surprises....
Looking back at last year I was right and wrong on my real estate predictions for 2013. Inventory did stay low but prices shot up to levels we last saw before the recession. While I expected to see a rise in home values, I didn't think we would see the significant increase we saw in Manhattan Beach and the rest of the Beach Cities in such a short time frame.
Homes that had been on and off the market for years suddenly found new owners at new price levels. Builders stepped back in the market with a lot of cash and entry level buyers found themselves facing tough competition for smaller homes in all the Beach Cities but especially in Manhattan Beach.
Off market sales soared as agents networked to buy and sell homes for clients who didn't want to play the multiple offer game. All cash buyers made sellers very happy in the Spring and early Summer. While the market cooled a bit in the fall from the early part of the year there were still some big prices paid for prime properties.. especially on The Strand in Manhattan and Hermosa.
Inventory is still low in all the Beach Cities and I'm not sure 2014 will see a major increase in homes for sale in Manhattan , Hermosa, Redondo or El Segundo. Sellers generally want to make a move upward either in location or size. The big issue for folks considering selling is what can they buy to replace their existing home. With inventory levels remaining low this can be a sticking point. I think we will see both buyers and sellers wanting to add contingencies to contracts.
I believe we will see prices continue to rise due to normal market supply and demand forces but perhaps not quite as much as last year. New loan guidelines and an uptick in interest rates will have an effect on the market for buyers, A 1% rise in the interest rate is equivalent to a 10% increase in the price. If rates and prices increase simultaneously over a short time span we could feel an impact.
As always there are many things to consider when deciding to purchase a home or investment property. Over the years I have seen numerous changes in prices and markets.. but two things remain constant...someone will always have to sell and someone will always need to buy.....
Happy 2014 !