How Will it Impact the Market Overall?

Last week, there were reports here in the Minnesota Real Estate Market the beginnings of the mess the banks created by using ‘robo-signers’ to fast track foreclosure filings. It was said that “the process of foreclosing may grind to a screeching halt”. And, it has. Bank of America has announced that it has halted foreclosures in Minnesota and all other states. Other major lenders have ceased foreclosures in 23 states and some politicians are calling for a total industry-wide moratorium.

Today, we in the Minnesota Mortgage industry want to pass on what is actually taking place and what impact the situation may have on you and your family over the next several months.

Currently, many banks have ceased foreclosure procedures in all states which require a judicial process. You can find out whether your state requires such a process by visiting All Foreclosure.com which lists foreclosure procedures by state. It is our belief that all fifty states will eventually be impacted by the controversy.

How will it impact you?

That depends on where you are in the real estate process. We will look at three situations: your home is in foreclosure, you are selling or you’re buying a foreclosure.

You are a homeowner in the foreclosure process

It appears that some banks will be backing away from following through with normal foreclosure processes until they can be assured that their paperwork is in order. Early estimates are calling for a potential 30-90 delay to many foreclosure procedures (notices, repossessions, sales, etc.) However, there is absolutely no way for anyone to be sure whether your particular situation will be delayed.

You are currently selling a house

We have reported often on the affect foreclosures have on home prices in a community. The actual impact is measurable.

According to RealtyTrac, bank-owned properties went for an average of 35% less than non-foreclosure sales. Foreclosures not only absorb buyers but also impact the appraisals of the homes that surround them.

Obviously, if there are less distressed properties coming to the market, there will be less downward pressure on pricing in the short term. The Washington Post, in an article last week, reported:

Stretching out the foreclosure process would reduce the number of houses dumped on the market over the next six months, which could help firm up housing prices in the short term and put some extra support under a sagging economy.

There may be a window of opportunity for a seller to maximize the price they receive for their home if they sell in the next 90 days.

You are currently buying a foreclosure

A portion of the inventory of foreclosed homes on the market has been frozen. Banks and title companies (who insure good title to the property a buyer purchases) want to make sure the bank actually owns the property legally before they sell it.

The Washington Post in an article last week reported:

Nick Chaconas, a Maryland real estate agent, said he was one week from completing a foreclosure deal for one client, who was buying a $470,000 fixer-upper in Potomac, when an e-mail arrived putting the deal on the skids.

The e-mail, from the title insurance company involved in the deal, said the mortgage lender PNC was suspending foreclosure sales for at least 30 days “due to a review being undertaken on all foreclosure files.”

If you are buying a foreclosure, anticipate potential delays. We do not believe there will be large numbers of cancellations. Be patient and realize that you are getting a substantial savings on the purchase.

How long will the challenge persist?

The impact this will have on the housing recovery will be determined by both the depth and width of the challenge. Are there large numbers of homes that were mistakenly foreclosed on? We doubt it. Will the instances where errors (or even fraud) did exist cause mass delays? Maybe.

Peter J. Henning who follows issues involving securities law and white-collar crime for DealBook’s White Collar Watch explained:

The revelation of potential problems stretching across the foreclosure landscape means that civil suits against the parties to the process are inevitable. In individual foreclosure proceedings, homeowners would probably challenge any attempt to take title to the property, which may allow them to remain in their houses a while longer, or even stop the proceeding altogether.

On a larger scale, there are likely to be two potential classes of plaintiffs pursuing civil suits against the banks and others for their roles: first, homeowners who earlier lost their properties to foreclosure in which questionable documents were filed, and second, title insurance companies that may be on the hook for claims by purchasers of foreclosed properties who now have a cloud on the title to their house. Each may claim that the faulty documentation in the foreclosure cases caused them harm.

If class actions suits start to dominate this story, it could be a long time before we normalize the situation.

How will it impact the market overall?

There could be widespread ramifications. The Washington Post in an article last week:

It would not help the recovery of the economy, or the real estate market, if the foreclosure process became so hopelessly tangled that banks and investors effectively lose the ability to recoup the remaining value of their collateral. That would provide some immediate financial relief to households facing foreclosure, but it would encourage many more homeowners to begin shirking their mortgage payments in the belief that they would also be able to avoid the consequences. The long term consequences of that would be that mortgage rates would be higher and mortgage loans would be smaller and harder to get.

Bottom Line

As we said last week, fewer foreclosures coming to the market right now will mean prices will be less impacted. However, these properties will eventually come to market; if not now, than later. That will delay the housing recovery – perhaps for years.

Do you Know Who Actually Works on your Minnesota Mortgage File?

We in Champlin Minnesota housing industry have learned is that many customers have very little knowledge about who is actually involved in the home buying or refinancing process.  They meet with a Mortgage Consultant and fill out an application and then feel like they enter a black hole. They don’t know “what happens next” or “who all these people are”. Today, I thought I might shed some light on the typical roles and responsibilities of the participants. Now not every Minnesota mortgage company has the same timelines,  job descriptions, and workflow procedures, but since we all have to end up in the same place, they are fairly similar.  It’s just the ease and how we get there which can make all the difference in the world. 

I will assume your mortgage consultant helped you complete your application and explained all the disclosures, including the Good Faith Estimate and Truth-In-Lending, and they gathered much of your documentation to support your income, assets and credit-worthiness. Further, they ran your credit report and maybe even obtained an approval through an automated underwriting system. Of course they advised you as to loan product options and discussed rate lock choices. For most, the amount of information can be overwhelming. But what happens next?

The Processor

Your file is submitted to the Processing Department. The main function of the Processor is to verify all the information on your application, as well as order the appraisal. They will verify your employment history and income via the mail, the phone and/or confirmation from the IRS. They will source the necessary funds for closing and reserves; they will help dispute and/or explain any credit reporting challenges. They will review the Contract of Sale and the appraisal.  Then they will assemble all of the relevant documents and submit them to the Underwriting Department.

The Appraiser

The Minnesota Appraiser is an independent third party who gathers information about the home and gives their opinion of value. Appraisers weigh many factors- comparable homes that have sold recently in similar locations, homes currently for sale, the condition of the property, the replacement cost, what the home could rent for, etc. The appraiser is supposed to protect the borrower and the lender. No one wants the buyer to pay too much, and the lender needs to make sure their cash investment is satisfactorily secure. The appraiser is not usually an engineer. They do not certify as to the “life expectancy” of the home or its improvements; however, they do often raise issues that should be addressed by a home inspector.

The Underwriter

I have long referred to underwriting as “the speed bump of the mortgage process”. Underwriters are charged with protecting the company from fraud and unsound decision making. While the borrower, the loan officer and the processor are pushing to get a closing, the underwriter says “slow down”. They look at the quality and consistency of the documentation. They add common-sense to the factual analysis of the automated systems. Files are approved, suspended or rejected.  (If the LO and Processor did their jobs correctly, rejections are rare.)  Most of the time, the underwriter will find some areas that need further clarification or documentation….and so the file goes back to the Processing department.

The processor and LO work with the borrower to satisfy the conditions. The file is then given back to the underwriter for review and hopefully the issuance of a Clear To Close.

The Closing Department

The Closing Department is focused on making sure the lender is covered legally. They review the title report (checking for gaps in the chain of title, certificates of occupancy, real estate tax numbers and payments, as well as judgment, bankruptcy and Patriot Act searches). They prepare the closing documents for the lender and have them executed and delivered for recording.

As you can see, there are many people who are working towards a successful closing. Each of them are trying to make sure the borrower is qualified and informed of what their future holds, and, at the same time, they are trying to protect the lender from making faulty underwriting decisions.

Is It Time To Buy a Second/Vacation Home in Minnesota?

Most of the information that we see on TV, read in newspapers or magazines talk about how real estate prices have fallen dramatically in Minnesota and across the country.  However one nice thing here in Champlin, Minnesota is that the lower prices have given purchasers a chance to buy that second/vacation/retirement home they always dreamed of owning? We want to look at the second home buyer and see whether the current market presents a tremendous opportunity for this segment of the population.

Does buying make sense right now?

Senior Housing News this month did an article comparing the advantages of owning vs. renting for boomers and seniors. When discussing a possible purchase, they said:

Even though the returns from investing in real estate may be in question for the next few years, the benefits of purchasing a home now remain important as pricing may be at or near a bottom, there is a substantial amount of available homes for sale, interest rates on financing are the lowest they have been in a generation and the interest paid on a home mortgage is deductible. 

Unity Marketing, in a recent survey of high income families, found that one out of nine respondents (11%) had plans to buy a second/vacation home in the next twelve months. The wealthiest in the country have decided that now is the time to jump make into the real estate market.

Where are the best deals?

This past week, Reuters ran an article in their Personal Finance section which said now might be the time to buy that second home in the Sunbelt:

Look for a retirement or vacation home now. If you’ve been thinking you’d like a second home now or a future home in the traditional retirement Sunbelt, go shopping. Those markets are depressed by overbuilding, a lack of buyer interest and a boatload of foreclosures. You’ll be able to get a good deal.

In an article this week by Housing Watch, the South Florida market was discussed:

The forecast is that significant improvement will occur in a year to a year and a half. For South Florida, though, the forecast is what works in the area’s favor. It’s still a place where folks want to move and migrate to, thanks to the weather — perhaps a winter retreat for six to eight months or a second home. Once folks are more confident in their economic situation, they likely will begin migrating to the Sunshine State again.

Bottom Line

Now might be time to buy that second home. Prices in many regions of the country have dropped substantially. You should check with a local real estate professional in your current area that can get you great information on the areas that might interest you and your family.

House Prices: What Impact Will Foreclosures Have?

Foreclosures in Minnesota have had a major impact on house prices over the last several years. The next six months will again see a flood of distressed property inventory coming to the Minnesota market. Will this cause a ‘double dip’ in home values as some are predicting? We want to take a very objective look at this issue and try our best to help explain the impact foreclosures and short sales will have on home prices as we move forward this year into next.

Do foreclosures really impact prices?

The Wall Street Journal in an article on September 13th reported:

The speed at which house prices fall over the next few months could depend less on mortgage rates and Americans’ appetite for home buying than on how banks decide to manage the huge number of foreclosed homes they own or may take from delinquent borrowers in the near future. Unlike home owners, banks often are much quicker to slash prices to unload properties quickly. The upshot is that, the more homes being sold by lenders, the faster prices tend to fall.

And the WSJ is not the only one concerned about the flow of distressed properties to the market. Last week, Bloomberg reported: that Rick Sharga, RealtyTrac’s senior vice president said:

“If the market is left to fend for itself, you may see more serious price depreciation. Whether things fall precipitously depends on government and lenders controlling the inflow of new foreclosure actions.”

Is this foreclosure inventory growing?

Rather dramatically. According to an article in Housing Wire last week:

As the approximate 2.5 million homes in foreclosure complete the process, national delinquencies will fall, and REO inventory and short sales are expected to trend upward, according to a report released today by John Burns Real Estate Consulting.

In the article mentioned above, Bloomberg states:

U.S. home seizures reached a record for the third time in five months in August as lenders completed the foreclosure process for thousands of delinquent owners, according to RealtyTrac Inc.

Bank repossessions climbed 25 percent from a year earlier to 95,364, the most since the Irvine, California-based data provider began keeping records in 2005.

“We’re on track for a record year for homes in foreclosure and repossessions,” Sharga, said in a telephone interview. “There is no improvement in the underlying economic conditions.”

Ivy Zelman, chief executive of research firm Zelman & Associates and one of the first to warn of trouble five years ago was quoted in the WSJ article as saying:

“We see the perfect storm brewing with rising supply and falling demand.”

She estimated that distressed sales could account for half of the market by year-end if traditional sales didn’t rebound.

What will this mean to house prices?

Celia Chen, of Moody’s Analytics, in a September 16th article explained the impact foreclosures will have on home prices going forward

Prices, which rebounded more strongly than expected in the second quarter, will head south again. Prices will begin to fall outright as a growing number of highly discounted distressed homes hit the market at the same time that non-distress sales decline. Prices will descend until distress sales represent a smaller share of total home sales.

As we have forecast for some time, house prices will be the last measure of housing to improve, but the timing of the bottom has been moved from the first quarter of 2011 to the third quarter…the decline still to come has increased from 5% to 8%.

Distressed properties will keep prices descending. By 2013, enough excess supply—in the form of distressed inventory—will have been removed from the market to allow for strong price appreciation.

Bottom Line

Home values will continue to fall as more distressed properties come to market at discounted prices. Ms. Chen says this may continue through 2012. If you are considering selling in the near future, DO IT NOW!

Why Did Your Parents Buy Their Home?

We are in an interesting time when it comes to real estate here in Minnesota and across the country. Every decision we make about our housing options seems to be tied to money. Articles are written explaining that prices will still drop and therefore buying a home makes no sense. Some people have judged whether living in their home over the last ‘x’ amount of years was a good thing based purely on the profit they received (or didn’t receive) when they sold it.

Wait a minute. Did we buy the house to make money? Or, did we buy our house because we wanted a home for our family? We have posted on the reasons why buying a home today still makes sense financially. There are other reasons that people buy homes besides the investment however.

As a matter of fact, Fannie Mae just came out with their National Housing Survey which asked the question directly. The study broke up the answers into financial and non-financial reasons. The top four reasons and six of the top ten reasons were NON-FINANCIAL. The top four are below:

Is this a major reason to buy a home?

1. It means having a good place to raise children and provide a good education.
2. You have a physical structure where you and your family feel safe.
3. It allows you to have more space for your family.
4. It gives you control over what you do with your living space (renovations & updates).

Should this surprise us? Aren’t these the same reasons our parents bought their home? Aren’t these the same reasons we purchased our home?

The Bottom Line

For the last 200 years, the financial benefits of homeownership have always taken a back seat to the more important reasons for buying a home. Think twice before you make a decision based purely on the dollars involved.

Changes to FHA Mortgage Insurance Premiums

Our HUD/FHA friends are back at work changing some of the major Mortgage Insurance policies effective October 4th, 2010. The new law permits HUD to increase the amount of the annual mortgage insurance premium from a .55% on mortgages 95% Loan To Value (LTV) or greater to 1.0%.  An example of how the change effects a $200,000 mortgage see below:

Current Policy
$200,000 x .55 (Annual PMI) = $1100 Annually/ 12 months = $91.66 PMI Monthly

New Policy
$200,000 x 1.0 (Annual PMI) = $2000 Annually/12 months = $166.66 PMI Monthly

HUD has decided to raise the annual premium above however correspondingly lower the upfront premium from 2.25% to 1.0%.  See example below on the same $200,000 mortgage above.

Current Policy
$200,000 x 2.25% = $5000.00 (Up Front Mortgage Insurance)

New Policy
$200,000 x 1.0% = $2000.00 (Up Front Mortgage Insurance)

In conclusion, as of October 4, 2010 it will be less expensive from a closing cost standpoint to take out a FHA mortgage however much more expensive from montly payment standpoint.

Look at the Cost, Not just the price

For the first time since April, the interest rate for a 30 year fixed mortgage increased two weeks in a row. It didn’t increase much (.05%) but it was news because it had been so long since rates have ticked up. It will be interesting to see what the Fed reports today. We are not announcing that rates are headed higher. It is way too early to make that argument. However, the increase did make us look at the bargain rates are today.

Home values have fallen to October 2003 levels as measured by the Case Shiller 20 City Index. You can buy a home today for the same PRICE you would have prior to the housing bubble. That’s amazing!

The more amazing part is that it would COST you much less. You can purchase a home with a mortgage at a much lower rate than you would have in 2003. We did some research and found out that the mortgage rate at that time was 5.95%. Today rates are at 4.5%. We calculated what that would mean to a buyer’s monthly mortgage payment.

How much would you save?

Let’s assume for the sake of this example that you purchased a home and borrowed $200,000 via a mortgage. In 2003, your monthly mortgage payment (principle and interest) would have been $1,192.68. If you borrowed the same $200,000 today your monthly payment would be $1,013.37. Same house, same price but the COST is $179.31 less a month. That’s a savings of over $2,000 a year! Over the life of a 30 year mortgage, you would save over $64,000.

Bottom Line

If you are considering the purchase of a home but believe that waiting is the prudent thing to do because of price may continue to soften, make sure you keep an eye on interest rates.

We have a tendency to look at just the PRICE of the house instead of the COST. The cost is actually more important.