October 9, 2007

Today’s Real Estate

What is going on?

By Donna Nardi
Special to the Times

We’ve all seen the headlines: Lending Crisis! Banks Closing Their Doors!

No Loans Available!
While certainly of concern to most of us, we should look at the current situation with both feet firmly planted on the ground. Because fear can cause panic, it might be best to arm ourselves with factual information, solicit practical advice and act accordingly.

Brandon Knapp, vice president of Lawson & Associates Mortgage Planners in Campbell, offers such information and advice as he shares how lending works, how guidelines have changed, and how to negotiate the current lending environment.

Years ago, mortgage loans were almost all the 30-year fixed rate. As home prices increased, and the desire for homeownership remained high, investors saw opportunities to offer more choices and be more flexible with guidelines. Exotic loans were introduced offering features like 100 percent financing, no-income verification and teaser start rates.

So how did lenders get in trouble? The problem has been germinating for several years, with no single villain. The Fed cut rates to a 40-year low, spurring a housing boom that lead to double-digit appreciation rate increases across the country.

As lending institutions and borrowers became more bullish on the housing market, guidelines became reckless and exotic loans extended to shaky borrowers became a recipe for disaster. Borrowers with meager means watched their monthly mortgage payments balloon and couldn’t afford the payments. When some of these borrowers didn’t have enough equity in the home to refinance or even sell, the foreclosure rate increased.

Among the homes sold in California, the foreclosure (not delinquency) rate is actually quite low. Out of the 5,680 homes sold in California in 2006, only 697 were foreclosed on. The current delinquency rate is 3.25 percent. In some counties in California, homes have appreciated over 100 percent since 2000. This appreciation might be the “cushion” that has helped some borrowers in California refinance or sell their property and avoid foreclosure.

If you’re in the market for a loan, whether to refinance or purchase, you might want to consider the following. Your loan mustn’t be as conservative as a 30-year fixed, nor does it need to be the most flexible loan. Most borrowers needs fall somewhere in the middle.

As Brandon Knapp explains, the most important feature of a loan is that it meets the borrowers needs and it is affordable no matter how the loan rate might adjust. If you plan to own a home for a short period, a 5/1 might work for you. Why pay a much higher rate for a loan that will be fixed for 30 years? The flexibility of the ARM loans can save borrowers a lot of money over the long-term but avoid loans that are too flexible.

Just because you can get approved doesn’t mean that you can afford it. It is the ultimately the borrower’s responsibility to look at the worst case scenario and make sure that the loan will still work for them under such circumstances (i.e. the interest rate goes up, the home value softens, etc.). But, as Brandon points out, a good mortgage planner will help their client analyze different scenarios before they commit to it.

Brandon explains that when banks commit to funding a loan, a lot of them don’t keep the loan but sell it to secondary market investors. These investors have stopped buying many of the loans putting a halt on the amount of moneylenders have been able to offer consumers. Because of the lessened supply, rates have increased. A large part of what determines lender guidelines at any give time is what will make it saleable on the secondary market. Some of the recent changes in loan approval guidelines follow:

Rates on jumbo loans are much better on the 5/1, 7/1, 10/1 ARM than on a 30-year fixed rate.

Most jumbo loans that don’t require income verification will have much higher rates, require more down payment than in years past and have stricter guidelines.

Many lenders require borrowers to be self-employed to apply for a loan without verifying income.

All financing with less than 10 percent down will have much higher rates and stricter guidelines than for those borrowers putting 10 percent down or more.

Any loan with low credit scores will be tougher to approve than in recent years.

100 percent financing options are limited and require good credit and income/asset verification.
So how does one negotiate the current lending environment? Brandon’s survival suggestions are:

a) Get your documentation to a reputable lender quickly.

b) Be sure the lender has a backup plan if the borrower doesn’t have 20 percent down and good credit.

c) If the current lender closes its doors, borrowers should continue to make their payments as usual – another bank will purchase the loan and service it under the same terms.

d) Borrowers should work with a broker instead of a direct lender so they have access to many lending sources rather than one.

e) If you have an ARM loan adjusting in the next year, evaluate your options to refinance now to avoid stricter guidelines later.

So, while the media keeps abreast of the market, don’t the headlines fool you. There are loans available to qualified buyers. But, lenders are less likely to lend to risky borrowers without full documentation and some loan programs previously available are no longer. Home buyers can expect a general calming of the market, and even the possibility that interest rates will drift downward. This could make buying a home more affordable – at least in the short term. So, truly, the market is correcting itself and reducing riskier loans to those who cannot truly afford it.

There could be positive rewards for qualified buyers in this market. Home inventory is large, so there are plenty from which to choose. Also, sellers will be more willing to make concessions to buyers. So, it seems even in a “crisis,” there is a silver lining in the proverbial cloud.

Donna Nardi is a Realtor, Accredited Staging Professional, and Senior Real Estate Specialist with Prudential California Realty in Willow Glen. You may reach her at (408) 918-4410, or donna.nardi@prurealty.com, or www.HappyWayHome.com.