Ken Roberts - Real Estate Column - A New Year-A New Beginning

8/14/2019 Ken Roberts - Real Estate Column - A New Year-A New Beginning

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12 Sou t h B ay B u S i n e S S in S i d e r M ag a z i n e 1 S t i S S u e 2 0 0 9

By Ken Roberts

Icouldnt help but be moved

by the outpouring o hopegenerated by the results o the

presidential election, both hereand abroad. Mere words cannotadequately describe how monu-mental a shit in the power opossibility that exists now morethan ever beore. It has beensaid that a journey o a thousand

miles begins with a single step. We have taken a giant stridein the direction o one world, one people. Theres no doubta very long journey lies ahead. At times, real change arisesrom the atermath o catastrophe. The possibility or great

change lies beore us. However, there is still much to do.With the economy in shambles, the banking and auto in-

dustries in tatters, the national real estate market in a ree-all with oreclosures rising like ood waters rom Katrina,and a credit crunch squeezing business and consumersalike, one might ask i there a silver lining anywhere. Theanswer is yes.First, the state o the South Bay real estate market is hold-

ing up ar better than some areas in Caliornia. Both theSan Diego and Orange County markets are experiencing alarger decline in prices than our local marketplace. But thisis as disjointed a real estate market as I have ever seen in

that price declines vary dramatically even within the samecity. Some areas or tracts may have prices stabilizing, whilein another area within the same zip code, prices are stillalling. Short sales (where the bank agrees to take less thanwhat is owed against the property) and oreclosures thatcome back on the market as bank-owned properties (REOs)are making appraisals challenging. In act, new appraisalguidelines or a declining market require appraisers to useat least two comparable sales (comps) rom the last 90 daysinstead o the usual 180 days. They require a pending saleand a current listingor two current listingsat an equalor higher value than the comps. I the comps support theappraised value but the pending sale and current listing

are lower, the appraised value gets adjusted down accord-ingly.Second, the Federal Reserve, as part o the stimulus plan,

announced it will be buying about $500 billion o newmortgage-backed securities rom Fannie Mae, Freddie Macand Ginnie Mae between now and the end o June, plusan additional $100 billion o existing mortgage-backed se-curities. This announcement caused mortgage rates to dropand started a mini refnance boom that over the next sixmonths could give borrowers with loan amounts under

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$417,000 the opportunity to potentially secure some o thelowest mortgage rates o our lietime. The Feds commit-ment as a buyer o mortgages was intended to entice home

buyers back into the marketplace to help shore up prices.I the real estate market is stabilized, it is the frst step toboosting consumer confdence, stimulating retail spendingand thus sparking an economic recovery.As o January 1, 2009, the new high balance conorming

mortgage limit or loans over $417,000 has been loweredto $625,500 in Los Angeles and Orange Counties rom the$729,750 limit o last year. We were hoping they woulddo away with the $417,000 breakpoint so that rates, lend-ing guidelines and loan types would be the same up to$625,500. But that was optimistic. In act, pricing above$417,000 is not only higher, but depending on the lenderand day o the week, it could be anywhere rom .25 to 1.0percent steeper in rateor as much as two points (eachpoint is one percent o the loan amount) in ees! Pricing isvery volatile and guidelines dier slightly rom lender tolender. With loan amounts above $417,000, the amount ocash-out in a refnance is limited and there is an additionalone-point ee charged by the lender.For regular conorming loan amounts o $417,000 or

less, we now have risk-based pricing depending on cred-it scores. Again, pricing may vary slightly rom lender tolender, but just know that a middle credit score below 740will cost you in additional ees, with pricing increases ashigh as three extra points or scores below 660. Now more

than ever, credit scores are incredibly important. A recent30-day late payment on a department store card o just$10 can drop your score 80-90 points! Regular conorm-ing cash-out refnances with middle scores below 740 alsohave pricing bumps.In the old days, FHA fnancing was difcult, expensive,

slow and very fnicky about the condition o the property.Escrow periods were seldom less than 60 days. There wasonly one interest rate to choose rom, and the seller wouldhave to agree to pay several discount points or the buyerto get that rate. I a property had any deerred maintenance,it would have to be repaired prior to the close o escrow.And then real estate values rose much aster than FHA loan

limits, rendering the loan program nearly useless to evenentry level buyers in most o the South Bay. Today, mucho that has changed. While owner occupancy is still a re-quirement, FHA loan limits have increased to $417,000 orregular FHA and $625,500 or jumbo FHA. While there areseveral dierent FHA loan products today, the most popu-lar is the 30-year fxed rate. You have the ability to buy therate up or down by paying more or less points instead obeing limited to just one rate. Guidelines or regular and

jumbo FHA arent as dramatically dierent as they are with

A New Year, a New Beginning


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Sou t h B ay B u S i n e S S in S i d e r M ag a z i n e 1 31 S t i S S u e 2 0 0 9

over $625,500. There are a handulo banks, insurance companies andcredit unions lending out their owndeposits or jumbo loans and keep-ing those loans in their portolio andservicing them--meaning they collect

the payments. By not bundling themup and selling them in the second-ary marketplace to investors, theycan choose the rate, ees, loan typeand guidelines under which they willlend. For the consumer, that comeswith benefts and costs. The most ob-vious beneft is competitive rates. Weare seeing three-, fve- and seven-yearfxed rate ARMs, both ully amortizedand with an interest-only payment op-tion, rom the low to high fve percentrange. These are or loan amounts,

with some lenders, up to several mil-lion dollars. Thirty-year fxed jumbosare very difcult to fnd at a good (be-low seven percent) rate right now. Thedownside, or costs, associated withlenders still making jumbo loans at at-tractive rates are stringent guidelines,high credit score requirements, andvery low loan-to-value ratios. In short,only the best o the best borrowersand properties make the cut. Somelending guidelines are a little crazy

at times, such as not lending on acondominium project thats less than10 units, or 70 percent loan-to-valueor single amily residences but 55percent loan-to-value or condomini-ums. How about not counting rentalincome rom an investment propertyi the tenants are on anything shorterthan a one-year lease? Then theresalways payment shock. That meansi you are paying low rent in order tosave up or a home purchase and your

conventional fnancing. The biggestdierence is that with regular FHA,with compensating actors, you canget a borrower approved with highdebt ratios. Jumbo FHA will be moreconservative. With the ability to pur-

chase a home with three and one halpercent down, (all o which can be agit), add several non-occupying co-signers, (co-mortgagors) while blend-ing all borrowers income and debtsin order to qualiy and allowing lessthan perect credit, FHA is making amajor comeback as the loan producto choice or many borrowers. FHAguidelines require the roo to have atleast two years o economic lie re-maining, and any health and saetyviolations have to be corrected prior

to the close o escrow. That and FHAdoesnt like peeling paint. Any interioror exterior peeling paint has to be re-painted. The biggest limitation is themaximum FHA base loan amount o$625,500. As with conventional con-orming loans, there are price bumpsor loans over $417,000 and or de-clining credit scores. Mortgage insur-ance (MI) o a little over a hal per-cent is required on FHA loans as wellas an upront MI premium o at least

1.75 percent i the loan amount canbe fnanced by adding it to the loanamount, even i you are at the loanmaximum. Some investors who pur-chase FHA loans will allow you to re-move the MI Premium rom your loanater a minimum o fve years and ithe loan is paid down to 78 percento the original loan balance. In manyinstances, an FHA loan can be used torefnance when there isnt enough eq-uity to meet conventional guidelines.Because o the upront MI premium

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thats added to the loan amount, yourholding period or the property shouldbe long enough to cost-justiy the re-fnance. Once you have an FHA loan,should rates decline, you may be eli-gible or an FHA streamline refnance.

It doesnt require a new appraisal, soits possible to refnance even in theace o declining values.I you are a veteran, VA loans are still

around. They also have increased loanlimits to a maximum o $417,000 withno money down and no mortgage in-surance. Many ormer vets may besurprised to learn that today they canstill use those benefts to buy a home,even i they had owned a home previ-ously using their VA entitlement. Youcan be currently in active military

duty or honorably discharged. Youdont need to be a frst-time buyer. You

just have to owner-occupy the prop-erty as your primary residence. I youbuy a property using your VA entitle-ment, you cant buy another propertywith a VA loan as long as you havean existing VA loan, whether you arestill currently living there or not. Aterit is paid o, however, through sale orrefnance, you are ree to use your VAentitlement again and again. As with

FHA, there are many rate and point op-tions available, making it unnecessaryor the seller to have to pay any pointson your behal-- and the 30-year fxedis the most requested loan type. Alsoo note is that there are some limitson some closing costs charged to theveteran, and some small charges arerequired to be paid or by the selleror the veteran.There are some lenders still mak-

ing jumbo loans at attractive rates. Jumbo loans are those with amounts

If you think you can time the bottom of either the real estate market or

mortgage rates, how well did you time getting out of the stock market? Its

much better to get a good rate and a good value even if rates and prices were

to dip a tad further than to miss it by waiting.


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mortgage payments are going to be more than 100 percentmore than your current rent, no matter how high your creditscores, no matter how big your down payment is, no mat-ter how much you have in cash reserves ater the purchase,and no matter how big your income is, you will be declined

because you dont have a history o paying a big paymentlike a mortgage! They can draw lines anywhere they wantand cherry pick all they want. At least there is good moneyout there available or higher loan amounts.The residential mortgage marketplace will continue to be

volatile, but within a range. I am recommending those in-terested in refnancing get all their documentation together,get approved and wait or a avorable day when mortgagebonds put on a big rally, causing rates to dip. Have a targetrate determined with your mortgage proessional so theyare prepared to pull the trigger and lock at the opportunetime. Dont sit around waiting or some perceived bottom

only to try and scramble when it comes. I you are not pre-pared, ready and waiting, rates will dip and spike back upand you will miss it.I you are trying to buy in the South Bay market, know

that we dont have as many short sales and bank REOs asin some other areas. I you fnd one you like and it is well

priced in relation to the market, it will sell ast, in multipleoers, over ull price and to the highest bidder with thelargest down payment and the shortest escrow period--usu-ally with almost no contingencies. I have seen oers sub-mitted on both short sales and bank REOs where ater twomonths o waiting, there hasnt been a hint o an answer.

Not an easy road Sometimes you are better o trying tobuy a home that has been on the market or a long timeand has a large price reduction rom extremely motivatedsellers. Timing is everything. I you are buying up in pricerange in this market, it works well. You may be selling low,but you are buying low and when prices rebound, yourpurchase will go up more in value than your sale property.I you are thinking about downsizing, sit down with yourmortgage planning proessional and see i makes sense topurchase now without selling. I your current residencewas your primary residence the previous two years, youcan rent it now and buy another primary residence. As longas you sell your previous residence within three years o

converting it to a rental, it would still qualiy or the capitalgains tax exclusion or the sale o a primary residence o$250,000 tax-ree or a single person or $500,000 tax-reeor married couples. That way you could potentially sellinto a higher market later or more money. While there are


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no guarantees about real estate valuesbeing higher in three years, we have a

much better chance o having higherprices in three years here in SouthernCaliornia than in many other parts othe country.Because banks are teetering on the

brink, pricing is all over the place andlenders will switly move in and outo the market. Banks may oer com-petitive rates one month, but will thenraise them i they get more businessthan they can handle. For that rea-son, it makes sense to work with amortgage planner who has as manylending sources as possible. Dealingdirectly with one bank can really limityour choices. We have a six-monthwindow, at least, or great mortgagerates. No one knows how low rateswill go. No one knows how low realestate prices will go. I do know thereis a big inationary cycle coming atthe end o this economic disaster.With the Federal Funds Rate near zeroand the Fed throwing around hun-dreds o billions o dollars to try and

fx the mess we are in, that spells I-N-F-L-A-T-I-O-N in a big way later. TheFed will have to raise short-term ratesin the uture like crazy to try and holdo a runaway reight train o ination-ary pressure that will show up. Thatmeans a period o higher mortgagerates beore things settle down againin a range. We need to position our-selves to take advantage o low ratesnow. When the time is right, mortgagerates will move higher in a blink com-pared to real estate values. I you are

going to refnance, do it soon. I youare going to purchase, do it as soonas you fnd the right property. Wait-ing or the absolute bottom is not agood strategy. It begs the question,I you think you can time the bot-tom o either the real estate marketor mortgage rates, how well did youtime getting out o the stock market?




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30 Sou t h B ay B u S i n e S S in S i d e r M ag a z i n e1 S t i S S u e 2 0 0 9

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Continued from page

hard or their own interests whiledamning the big picture view.The governing institutions o the

worlds eighth largest economy are indire straits, but our state is not termi-

nally ill by a long shot. In many ways,were doing better than other partso the country hit harder by the sub-prime mortgage meltdown.Caliornia will ride through this and

remember, we have been throughtough times in the past. Our one weak-ness is that with most o the popula-tion in the southern hal o the state,we low-key So Cal types oten dont

pay attention to our dysunctional

government in Sacramento. This has

led bad political policy to go by un-

checked or ar too long. The only way

or us to fx this mess is to get a grasp

o the intractable issues, identiy thepainul compromises we are going to

have to make to keep our state run-

ning as we have grown to accept it,

and not let intransigence deepen the

crisis any more than it already has.n

David Whitehead is the publisher of Busi-

ness Insider Magazine. He can be reached

at: [email protected].


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Its much better to get a good rate anda good value even i rates and priceswere to dip a tad urther than to missit by waiting. Remember, how do youknow the bottom has been reached?

By looking back and saying, Wow,there it was!nKen Roberts is a mortgage planner

with over 30 years experience in theSouth Bay real estate market. Ken canbe reached at (310) 792-7090.


Ken Roberts - Real Estate Column - A New Year-A New Beginning

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Transcript of Ken Roberts - Real Estate Column - A New Year-A New Beginning