First Ohio Home Finance

We heard recently from one of the lenders we deal with that Fannie Mae is killing its broad declining market policy. Before you celebrate, though, read on to see what plans they have for real estate!As recently as January 2008, Fannie Mae decided that labeling entire zip codes or counties – even states like California and Florida – as declining markets was a good idea to protect their interest in residential real estate. The blanket designation could not be appealed or overturned by specific underwriters.

As the GSEs like Fannie, Freddie and FHA’s Ginnie steer away from blanket designations, they are going to a 20-point appraisal review system. This will allow underwriters more authority to review each file and grade the property appraisals.

If the appraisal has comparable sales outside of the time or location guidelines, excessive adjustments to value or other problems, the value would be cut or the appraisal rejected.

We are having to fight harder and work more closely with our approved appraisers to keep deals afloat. I am still trying to get my hands on the specific guidelines. When I do, I’ll let you know.

A further complication is the Fannie and Freddie guideline that, as of January 2009, employees involved in loan production will not be allowed to order appraisals or choose an appraiser. Appraisals will be ordered by non-production employees or the end lender AND only from a handful of national appraisal management companies or AMCs (think Old Republic, Land America, etc).

So what does all that mean?

Consumer’s cost for residential financing will be driven higher and higher as AMCs that get government blessing will have a monopoly and charge higher and higher prices. This, in turn, will engender new regulations called price controls. National appraisal companies already charge 40% more than the typical $350 conventional appraisal.

Regulation also has a way of forcing small business out of the market (the ones to best know local markets) as it aggregates power and control higher and higher. That goes for everyone involved in loan origination – appraisers, local brokers and correspondent lenders, title companies, etc.

Since this new regulation does not yet apply to FHA, it also means that more financing will be FHA-insured loans. That can be a good thing for both borrowers and FHA-approved lenders. The downside is that FHA guidelines are fairly cut and dry – unimaginative, if you will. That means the pool of borrowers – such as the self-employed who write-off expenses, fixed income seniors with high DTI ratios, bruised credit borrowers, etc - will become smaller and smaller.

Bottom line: good for major banks, bad for consumers and small business.

I go to a number of networking events each week, some with the Chamber of Commerce, smaller groups, or dedicated Young Professionals. It never ceases to amaze me how, upon learning that I work in the mortgage industry, these people look at me sadly as empathy washes over their face. They say something like, Oooh, that must be hard now!

I usually explain how it’s becoming a fun challenge! That’s not because I am coming from a position of phony bravado, sheer ignorance, or unrealistic confidence. I truly see the current market as a positive place to be. We have less competition, a reasonable selection of conventional and government loan products, and steady number of clients wanting those products.

I also explain that most of the bad news you read is from Realtors and sellers, frustrated with waves of competition in the marketplace.

According to a recent report from the NAR, the average Realtor is having a tough go. The report showed that the average Realtor is a 50-year old who works more than 40 hours each week, and made less than $40,000 in 2007. It also shows only 82% use cell phones and 27% use digital cameras.

While the overall statistic is not a huge vote of confidence for the sales side of real estate, it illustrates the need to do business with the very best. Now more than ever. There are great Realtors out there who have amazing teams, the latest technology, broad experience, and a deep pool of clients and contacts.

If you are considering selling your home, heard rumors about a transfer, or can see that you would want to refinance in the coming 12 months, call us today. Many people are still refinancing out of adjustable rate mortgages, for home improvements now that they expect to be in their home awhile, or for major expenses like college tuition.  We can get a team of professionals in lending, real estate, tax, and financial planning to support you as you make critical decisions for your family.

I have been involved recently in a surprisingly cooperative effort to find solutions to the residential real estate slowdown. I won’t call it a bust, because it hasn’t been catastrophic in the central Ohio market. It really is becoming – and will continue to be - more difficult to find loans for buyers with a poor history of paying their bills and for marginal investors. But by and large, the market is moving on. There are a solid number of buyers in the market, and more than enough sellers.

Every week, one of the top news stories is the steady rise in home foreclosures here in Ohio. The issue is affecting our local economy and, more importantly, the lives of real people in our own neighborhoods.

State executives - including the governor, attorney general, treasurer, chief justice and others – seem to be really worried about housing in Ohio. Executives have been touring the state with news conferences and collaborative meetings. Foreclosures are quite common in some neighborhoods of Cleveland and Toledo, which unfortunately leads to theft, vandalism and general deterioration of communities.

Among the solutions being rolled out:

• Lenient property tax payment plans by county treasurers around Ohio
• A new foreclosure mediation program headed by the state Supreme Court
• Increased legislation to subsidize borrowers and regulate mortgage brokers
• Increased education from and interest in public and private educational programs
• Pressure on lenders to help homeowners – including subordinating 100+% LTV second loans, easy negotiating for short sales, even partial mortgage forgiveness when a helpful refinance is held up due to appraisal problems.

The local group I am involved is the Save Our Homes Taskforce (site currently down). A task force is really a simple name for a loose group of people working toward a specific goal. This particular group, meeting on East Broad Street, is attended by non-profit educational groups, county leaders, and some lender representatives. Many of our company’s loan officers will be attending a statewide summit on April 23rd to refresh our best practices and learn about some of the above efforts.

Some of the initiatives our task force include identifying community resources, conducting homeowner and professional seminars, exploring ways to deliver foreclosure counseling, and lender remediation. The idea is catching on across the state, thanks to Ohio Treasurer Richard Cordray.

Now some people may be cynical of these efforts by politicians to intervene in the market. While I share some of those sentiments, I appreciate the interest and leadership as long as the solutions are mindful of the free market and participation is voluntary.

Here at First Ohio Home Finance, we are spending tremendous resources to reach out to those with adjustable and subprime loans. We believe Ohioans who are not under the direct and regular advice of a financial planner should move as fast as possible into fixed and affordable mortgage payments. That means you need the advice of a professional loan officer who can advise you on the best mortgage product for your needs.

I’ll let you know how the Save Our Homes Summit at the end of this month goes.

In between the stock market volatility and emergency rate cuts and recession talk, last week was full of headlines like talking about home prices at decade lows, linking investment losses to housing gloom, and drawing parallels between current markets and the Great Depression.”

So what is all the noise about?

I find Joe Peffer’s blog particularly helpful as a window into the local markets. There aren’t many Realtors having these kinds of open conversation online, and his is certainly one of the best. Here’s a brief excerpt from Friday’s “nutshell” post.

“Remember that most media stories are greatly effected by larger east and west coast markets and that all Real Estate is Local. Here are some facts and figures on our market, here in Central Ohio.

• Last year was the third highest number of sales ever in Central Ohio. Yes, it was down 4.5% from 2005 and the average sale price is down a `whopping’ 1%, but it was still a good year. Today, compared to 2004, only 3 years ago, we have sold close to the same number of houses and the average sales price is up nearly 3%.
• Inventory levels are at record highs providing prospective homebuyers with the best selection of homes in the history of central Ohio!
• Our home prices are very competitive. Right now, there are more homes for sale than buyers to buy them. The result is that sellers are pricing their homes to compete. As the market corrects itself, home prices will start to increase again. So, buyers should act now while homes are priced to sell!!!
• There are still many great loan programs for deserving buyers.
• The recent Fed cut is good news! Even though a Fed rate cut doesn’t necessarily spell lower mortgage rates, it does mean good news for housing.”

Here’s another great point from Joe:

“Why was the average sales price in Central Ohio down 1%?

• First, because for much of the year we had roughly ten homes on the market for every buyer, many homeowners were forced to drop the selling price of their home in order to compete.
• Second, we had 22 percent fewer homes sell in the $1 million dollar range. Homeowners resistance to drop the price as well as lenders’ temporary aversion toward jumbo loans likely had impact here
• And third, we saw 124 percent more homes sell for less than $30,000. Many of these lower priced homes were purchased by investors who recognized just how favorable the 2007 housing market was and took full advantage of these conditions.”

One last note you will find interesting is this controversy in Massachusetts (and probably a great deal of other places now) where a bankers’ trade group is reporting single-family home sales were down twice as far as the Realtor’s association reported. And average home prices were down 5 times what the Realtor’s reported. The discrepancy apparently stems from the Realtor’s group NOT including homes sold by owner - without a real estate agent.

In my mind, what this issue highlights is that the RESULTS of one’s home sale are much worse when you try to save money by cutting out reputable local professionals. There are dozens of good Realtors in our market. Chances are you will sell your home faster and for more money if you use one.

Ask me if you are interested in buying a home. We will make sure you get a thorough pre-approval and one of the best Realtors in our market. Nothing makes your home purchase smoother!

The Federal Reserve Bank cut the federal funds rate to 3.5% this morning before markets opened. This was obviously and openly in response to stock markets around the world ‘in panic’ or ‘crashing’ over the last four days.

Here’s how the Fed couched it’s latest action (emphasis mine):

The Committee took this action in view of a weakening of the economic outlook and increasing downside risks to growth. While strains in short-term funding markets have eased somewhat, broader financial market conditions have continued to deteriorate and credit has tightened further for some businesses and households. Moreover, incoming information indicates a deepening of the housing contraction as well as some softening in labor markets.

Fed Policy Statement on Surprise 75BP Rate Cut

What those who have an interest in real estate should remember is the Fed controls short-term interbank rates - not mortgage rates. While there is a trickle-down effect to consumers with variable rate consumer debt (think credit cards and home equity lines), Fed rate cuts generally send mortgage rates higher.

Surprisingly, mortgage bond trading has been positive, though. Retail fixed rates for prime borrowers have been reported as low as 5.5%. So the combined effect right now is positive as borrowers have lower debt service and lower mortgage rates. Time will tell, but I firmly believe pricing will worsen as the market digest this unusual move. The news is extremely inflationary and will eventually send rates higher.

The other piece of the puzzle that I think will send rates higher is that the domestic bond market relies heavily on foreign central banks and investors. If those banks are rushing to save their own markets/economies, how much will they have to invest in US markets that are conservatively described as defective? So if demand falls, prices fall and yields/mortgage rates are forced upward.

Congress and the Federal Reserve Bank are both hard at work in working to stem the tide of foreclosure in our country. They have proposed increased regulation and disclosure to attempt to persuade homeowners and home buyers from the current mortgage system.

On one front, the Federal Reserve governors have issued the most sweeping reforms of the HOEPA in decades in an attempt to reduce losses. These reforms speak ONLY to high-cost loans, although most of the media is translating that to ’subprime.’ The underlying change is re-defining high-cost as an APR 5% above a similar Treasury bill. For example, a 30-year fixed rate loan would fall in this category if the APR topped 9.6% today, or a 5/1 ARM topped 8.6%. Clearly these ARE high-cost loans, since conventional borrowers are finding APRs in the 6.5-7.5% range.

Essentially, the bankers want to end stated-income lending, mandate escrow of taxes and insurance, halt prepayment penalties before an adjustable loan resets, and disclose to borrowers dollar-specific compensation that would go from a lender to a broker. Furthermore, the lender would have to “consider” a borrower’s ability to repay.

Another important point consumers need to be aware of is more and more conventional borrowers are becoming subprime or non-conventional because of a decline in available mortgage products. This is b/c credit score requirements are being raised - you’ve probably already heard that 720 is the new 680. As you can imagine, this is EVEN more true for subprime and alternative credit loans.

So, what would these changes mean for the average conventional borrower? What would the changes mean for the average subprime borrower?

For conventional borrowers, the only change would be the upfront disclosure of compensation. Most of the controversy surrounding this issue is b/c most brokers have not chosen a lender or locked an interest rate at the time of initial disclosures. To require them to disclose is essentially a requirement to estimate and then re-disclose later in the process. Bottom line, more paperwork and more consumer eyes-glazed-over.

For subprime borrowers, there will be devastating consequences. As hundreds of lenders have hit the fan in the last 12 months, finding an appropriate, reasonably-priced subprime product is very difficult. When you kick out prepayment penalties, end stated income, and require escrows, there will be fewer loans available for those with bruised credit or unusual circumstances. That means fewer homeowners among those with low-income or not particularly financially savvy - the opposite of what the establishment wants.

All in all, the solution is not more government intrusion. Financial institutions have successfully facilitated American home ownership for decades.

The current web of crises are directly linked to the Federal Reserve keeping low short-term interest rates for TOO LONG following the dot-com bust of 2000, which led to a warping of the world economy. Ending the manipulation of financial markets is the ideal answer.

President Bush sent his Treasury Secretary out with a proposal yesterday to try to stem the tide of subprime mortgage defaults and foreclosure. The America Securitization Forum, which represents mortgage investors and mortgage servicers, recommends mortgage servicers freeze interest rates for borrowers Read the rest of this entry »