Manhattan Beach-Beach Cities: Jumbo Loans

The market may be showing signs of resolving some of the issues that surround the Jumbo loan issue. Indymac announced today that they sold $240 million of AAA bonds backed by Prime Jumbo fixed rate mortgage loans and $350 million of AAA bonds backed by Prime Jumbo adjustable-rate mortgage loans.. However Indymac is not out of the woods yet although this news mat allay some fears.

This may mean that the secondary market is realizing that not all Jumbo loans are high risk loans. This bodes well for our market. You will still need a down payment and good credit to get a Jumbo loan. No doc loans are gone but I understand that some lenders are considering a form of the stated income loan with verifiable assets. I think this would be a good compromise for higher priced markets.

I talked to three lenders last week and all think the market may be showing signs of investors being ready to think about returning to the credit market. One of my favorite Mortgage guys, Brian Brady , has likened the current credit market to the NFL Draft picks.. everyone wants the players but no one wants to set the market by making the first bid.. but as he also notes Investors don't make money if they don't invest..

The market is still not in great shape and many areas are going to see more foreclosures over the next few months unless banks figure out some solution for loans that are getting ready for rate adjustments. Countrywide is still seeing share prices drop and Home Depot had to restructure the sale of one of its home distribution business by lowering the price from $10.3 billion to $8.5 billion. Sales volume in CA declined in July while prices increased slightly.

Update: August 29, 2007

Does Indymac know something we don't? The Los Angeles Business Journal in a post this morning notes that Indymac is hiring 600 new employees. Also as noted yesterday ... they are not only getting ready to make jumbo loans but are going to in-house them... that is keep them in their portfolio. So why would they do this? Ah... they do know something many have forgotten... people who take out jumbo loans document their income and have larger down payments... Hmmmm...Maybe the people who buy in the Beach Cities really can afford their homes...

Manhattan Beach-Beach Cities: Home Prices and Loans..

On Friday the FED lowered the discount rate and is widely expected to lower the funds rate at it's next meeting in September. The discount rate is the rate banks charge each other for short term loans and the funds rate deals with the cost of money or interest rates. The discount rate will help the credit market retain liquidity and the funds rate rate will have an effect on mortgage rates down line. It's a bit confusing as mortgage rates are actually determined by the bond market...but let's not get too technical.

The credit market is not out of the woods yet and Jumbo loans will continue high as long as the market sees them as risky. Lenders are going out of business as fast as they used to go into business. If you aren't familiar with Implode.com and it's Mortgage Lender Implode-0-Meter take a look. There are now 128 lenders that have officially shut down their lending programs. National City Mortgage which is a big player in the second market is also in trouble. When you get players like Countrywide, WAMU and National City looking shaky then you have big problems. This is not going to go away in a week or two with business returning to normal. To see how rate hikes on Jumbo loans affect our market read The Great Loan Blog post..

So what does it mean to us... well Manhattan Beach has only had 8 properties (homes and townhomes) go into escrow since August 1, 2007. North Redondo, our affordable property gage, has seen 15 pending sales(homes and townhomes).. and 8 of those were before August 4, 2007 when the market took the big dive. South Redondo is actually the big winner with 21 pending sales... El Segundo has 4 and Hermosa Beach only has 3 pending sales since August 1, 2007 .

New listings are not coming on the market and I'm beginning to see some larger price reductions in North and South Redondo. I expect to see home prices in Hermosa Beach and Manhattan Beach shift downward a little in those markets with large inventory over the $2 million mark.

If you have a home that has been on the market over 60 days and no one loves you it might be time to either take it off the market, rent it or think about a realistic price reduction. Otherwise you are going to be chasing a down market and in the end it will cost you more then a quick price reduction today. Trust me on this... the jumbo loan market isn't going to get significantly better even if the FED cuts rates in September. I don't see a major fall in prices (25%+) but I do believe our market is headed for some tougher times as the real estate market tries to adjust to the woes of the financial markets.

No one wants to believe that the South Bay-Beach Cities real estate market will be affected but it will... so be smart now. If you have to sell.. bite the bullet and price your home to sell in today's market not last year's market.

Manhattan Beach-Beach Cities Real Estate: Foreclosures...Big Trouble?

The problems in the financial markets have spurred speculation on the prices of Manhattan Beach real estate and real estate prices in the other Beach Cities... Hermosa, Redondo and El Segundo. Many are predicitng (hoping) that the entire South Bay real estate market and the Beach Cities in particular will crash dive. I don't think our market will escape unscathed but I don't see it going back to 1990 levels either.

In last Sunday's ( August 12, 2007) LA Times there was an article titled Foreclosures May Spur Price Drop... that has a cool tool labled Foreclosures: How Does your Zipcode Fare next to the article. If you put in a zipcode it tells you how many foreclosues are in that zipcode. Naturally I put in the zipcodes from the Beach Cities and wasn't surprised at the results.. namely there are very few bank owned properties in Manhattan Beach, Hermosa Beach, Redondo Beach or El Segundo. There are a total of 8 bank owned ( reo) properties in the Beach Cities. However if you go to inland cities you will see a much higher number and they are going to have some problems.

Here's how the numbers break out..

Manhattan Beach: 1

Hermosa Beach: 3

North Redondo : 2

South Redondo: 1

El Segundo: 1

Yes.. there will be more in the future... that's life. There will be people who get divorced and run into problems. There will be those who can't refinance and will have to sell or lose everything. Some will have health problems and huge medical bills. There will be people who lose their jobs and can't make their house payment. But these are problems that happen in all markets. We just got used to the fact that you could sell fairly quickly if you got in trouble and that option is not as viable.

Most homeowners in our area are in fairly decent financial shape and should weather this market relatively intact. Many who don't have to sell will simply take their homes off the market. Prime location property will likely continue to see big dollars as these properties are getting scarce. Marginal location property and homes in poor condition will not bring top dollar and will see discounted prices. Those who have to sell will need to be sure their property is in excellent condition in order to beat the competition. The will also need to be aware that prices may be fairly stagnate for a period of time as the market adjusts.

Buyers with cash and a good FICO (above 720) will be Kings in this market. Morgan Brown has a great three part series on credit.. Part III deals with improving credit scores. Whether you are a buyer or seller take the time to read this post. You might also want to check what Brian Brady has to say about the current financial market.

Manhattan Beach-Beach Cities:Real Estate..Are You a Bull or a Bear?

I 'm going to say this loud and in bold print... I like real estate.. and I think it will always be a good investment... I can't think of any other investment where you can buy an appreciating (long term) asset with so much leverage and over time..with a few exceptions... will always come out ahead on that investment.... and you have the added bonus of having a place to live. Google is a great stock but they won't let you move into the company headquarters.

The credit markets were whirling and twirling last week sending consumers into endless confusion. Much of the Los Angeles County market and our local South Bay-Beach Cities market is dependent on the jumbo loan(over $417,000) and that market is now deemed to be risky.

The reality is that most of the loans that will go into foreclosure are those with conforming loan limits($417,000-) that were made to people with poor credit who couldn't really qualify for them in the first place. Generally those buying in Manhattan Beach, Hermosa Beach, Redondo Beach and El Segundo with jumbo loans were able to afford the financing and are sound financially. The loans are considered risky because they are higher then the norm but our buyers are usually good credit risks. That said, we are in a segment of the market that is considered risky and we will pay a financial price.


One of the difficulties with cheap money is that too many people have used their homes as ATM machines.. not realizing that the cash they get is money they will have to pay back..and we certainly will have a few of those in the Beach Cities.. You can't fix dumb or bad judgment and there will always be a segment of the market that doesn't use good judgement.... whether it is consumers or the Wall Street credit markets.

We bailed out the banks in the 80's and they didn't learn from that fiasco which is why financial institutions are in trouble today.... it's about money and profits and as long as financial markets figure out ways to make money they will continue risky behavior believing the government will bail them out. They might be more prudent in the future if they had to live with their bad choices.

There was no need to stretch financial rules the way banks did in the last few years. Money was and still is incredibly cheap. I've been in real estate 28 years and with the exception of the last 8-10 years lending rates were in double digits. Guess what.. homes were bought and sold at 10%-12% and we thought it was a good market.

Yes we will see problems in the beach cities and if the rates for jumbo loans continue to be high we will see things slow because of the increased cost of money. People who have refinanced until they are out of equity will be in trouble. Does it make real estate a bad investment.. NO.... it means people make mistakes.. Real estate bought for the right reason and purchased within the financial means of the buyer historically is a good investment over the long run.

The key is long term.. real estate is not a short term investment.. it never has been and never will be. Many consumers forgot this in the frenzy to get rich quick. Sure there will be times when you can make a fast buck but historically real estate is a long term investment. In the giddy years of rising prices many lost sight of that fundamental aspect of the market and confused buying a home with playing the stock market...but then so did many of the professional hedge fund players.

Manhattan Beach-Beach Cities: Home Loans .. The Good News

As I've noted in my last post about Beach Cities Home Loans there are going to be major changes in how buyers qualify for a new purchase or to refinance their current loan. Many of these changes are going to create some challenges in the short term but will prove to be smart over the long term.

Tightening of loan underwriting guidelines should make financial markets feel a bit more secure and lead to home mortgage rates stabilizing over the next few months. Home loans are mainly tied to bond rates and tighter guidelines should still have an impact. Yesterday's concern in the stock market over credit woes by subprime lenders was evident as yields on the 10 year Treasury notes fell pushing up bond rates. If lenders can reassure the market that lousy loans are a thing of the past the markets may stabilize a little.

Most Manhattan Beach home buyers and those in the other beach cities of Hermosa Beach, Redondo Beach and El Segundo should not have major problems obtaining a home loan. Our buyers typically have good jobs, excellent credit and money for a down payment. The process may be longer and more arduous but not difficult. The biggest obstacle for homeowners in the Beach Cities will be if they want to refinance after owning a home for a short period of time.

The good news on real estate loans is that the rates are still pretty good. Most of our home buyers are looking at jumbo loans (over $417,000) because of the price of homes in Manhattan Beach, Redondo Beach, Hermosa Beach and El Segundo. Rates on jumbo loans will be higher then those on conforming loans. I suspect rates and points will be a moving target over the next few weeks until the market settles. This is definitely a time to do a locked in rate.

Next week will prove interesting as the FED will be meeting amid reports on productivity and reports about the consumer credit situation. Investors will be closely watching this meeting to see what they have to say in light of the current market woes.

The real test of the new guidelines will be for potential home buyers who have made poor credit choices or have not saved much for a down payment. They may have to postpone homeownership until they get their financial house in order. Frankly I think tightening the underwriting rules is a good move. It never made much sense to me to buy a home you couldn't really qualify for so you could watch it go into foreclosure a few years later. You don't have to be a rocket scientist to figure out that one.

Kurt Jackson offers some insight into what is happening behind the scene in The Story Behind the Story.. give it a read to find out more about how the lending world works.. Brian Brady , America's Most Opinioned Mortgage Broker, also offer a series of posts on what has been happening in the market in the last week.. Here is another good explanation on how the mortgage market works from Jeff Belonger.. Explanation of Mortgages: From the Beginning of Time.....

I will be adding more to the story as the market figures out how much money they want upfront to cover their risk level. Rates may stay level but points could go up considerably

Home Loans: Rates Higher.. Banks Say No to Subprime

Interest rates remain on the high side for the second week in a row as bond rates jump around and Wall Street keeps a close eye on Bear Stearns and other hedge funds. As an added note most major banks are discontinuing the interest only subprime 2/28 loan that has caused a majority of problems for homeowners. Wells Fargo joined Countrywide and Washington Mutual in announcing they will no longer offer these loans to borrowers.

If you are considering buying a home or townhome in the South Bay/Beach Cities now is the time to contact a lender to find out where you stand with the changes in lending rules.

Conforming Loans: $417,000 or less

30 Year Fixed 6.375%
1.00 Points

15 Year Fixed
6.250%
1.00 Points

5/1 ARM
6.125%
1.00 Points

Jumbo Loans: Over $417,000

30 Year Fixed 6.625%
1.00 Points

10/1 Interest Only
6.500%
1.00 Points

5/1 Interest Only
6.125%
1.00 Points