How to buy Foreclosures

This video was sent to me as I am attending the REOMAC (REO Managers Association of California) meetings in Palm Desert California. Because I have been an REO expert for 20 years, I became a member of REOMAC several years ago.

REOMAC is the leading organization for the mortgage default industry, and its two annual meetings provide its members with a tremendous amount of information on the amount of foreclosures throughout the country, and the best ways to help lenders and consumers work together to reduce the number of foreclosures.

Watch and learn!

Some Good News From the Falling Stock Market

Monday, the Dow Jones Industrial Average closed below the psychologically-important 10,000 level for the first time since 2004. 

Despite the milestone-marker breach, however, there was a large group of Americans with reason to cheer.  As stocks sold off, mortgage markets rallied to the benefit of home buyers everywhere. 

Conforming mortgages rates improved yesterday.

Most interesting here is that rates improved for the same reason that the stock market fell.  Because of lingering concerns about the worlds' economies, investors lost their collective appetite for risk Monday.  In response, they sold their stock positions and parked the proceeds in the "safe haven" of U.S. government-backed debt. 

The extra demand for safe investments pushed up the prices on mortgage bond which, in turn, pushed down mortgage bond rates.

Now, we can't predict when the market's risk appetite will return, but when it does, expect money to flow into stocks just as quickly as it left. 

All year long, with respect to stock markets, it's been either "everybody in" or "everybody out" and, for now, it's everybody out.  This is why mortgage rates fell Monday. 

But, when the momentum shifts -- and it will shift -- mortgage rate shoppers would do well to be prepared.  Be ready to lock that mortgage rate because as soon as the stock market reverses course, mortgage rates will head higher. 

If stocks recover as quickly as they tanked, expect mortgage rates to spike badly.

(Image courtesy: USA Today)

Translating Fed Speak

For the third consecutive meeting, the Federal Open Market Committee left the Fed Funds Rate unchanged at 2.000 percent.

Of interest to mortgage rate shoppers, the FOMC led its press release with comments about the health of the financial and labor markets, calling them "strained" and "weakened", respectively. The relative weakness in both of these areas has contributed to low mortgage rates of late.

The FOMC also noted in its release that, although economic growth has slowed this year, the historically-low 2.000% Fed Funds Rate should foster "moderate economic growth" in the future.

In the wake of the announcement, Wall Street is rallying. Investors like what the Fed had to say and this is attracting money to the stock market at the expense of bonds.

Mortgage rates have given up all of Monday's gains, and then some.

Source
Parsing the Fed Statement
The Wall Street Journal Online
September 16, 2008
https://online.wsj.com/internal/mdc/info-fedparse0809.html

Investor face New Lending Limits

In its last act as a semi-independent company, Fannie Mae altered mortgage guidelines for real estate investors last Friday. It was Fannie's 22nd update this year.

The first part of the guideline change limits the number of properties owned by any one person. 

Fannie Mae will now decline any mortgage application for a second home or investment property if the mortgage applicant already finances, or will finance, more than 4 properties in total.

The former guidelines allowed for 10.

There is a loophole, however.  Fannie Mae will not count properties against the 4-property limit if they are held in the name of a corporation.  This holds even if the real estate investor is the sole owner of said corporation. 

Investors, therefore, should consider moving their properties into a corporate structure to avoid triggering Fannie Mae's 4-property limit.  Many take this step for liability and taxation reasons, but it's now a good idea for mortgage approval reasons, too.

The second part of the guideline change cannot be so easily avoided.  Fannie Mae is assessing new, loan-to-value based loan fees on all investment property mortgages.

• Loan-to-value less than 75 percent : 1.75% loan fee
  
• Loan-to-value 75.01-80.00 percent : 3.00% loan fee
  
• Loan-to-value 80.01-90.00 percent : 3.75% loan fee

These fees are mandatory and are in addition to any whatever other risk-based loan fees Fannie Mae may assess.  Currently, those fees amount to a half-percent at minimum for real estate investors.

Since its Fannie/Freddie takeover, government officials have not addressed whether mortgage guidelines will be rolled back to "a looser time".   If they are, it would be a big deal for real estate investors because, as many are finding out, low rates don't matter much if you can't qualify for them.

If you're currently in the market for an investment property (or two), consider that it may be cheaper and simpler to purchase over the near-term versus the long-term.  And consider moving your existing properties into a corporate structure first.

How The Government Take Over of Fannie Mae and Freddie Mac lowered Mortgage Rates

When comparing two investments with equal risk, a rational person will choose the investment with a higher rate of return.

This behavior is called Risk Aversion and is a basic tenet of personal investing.

An off-shoot of Risk Aversion is that a rational person will only invest in an instrument of greater risk if the returns are greater, too.

The chart at right illustrates this concept, comparing return rates on two investments:

• U.S. Government bonds
  
• Mortgage-backed bonds

The difference in investment return rates is sometimes called a "spread" and the historical spread between government debt and mortgage debt is somewhere near 1.5 percent. 

However, notice how the spread started to grow starting in July 2007.

July 2007 marked the "official" start of the Credit Crunch and as mortgage delinquencies grew nationwide, so did the market's perceived risk of investing in them. 

By the start of this month, the spread had nearly doubled.

But that all changed Sunday.  When the government announced its takeover of Fannie Mae and Freddie Mac, it put the same "risk-free guarantee" on mortgage debt that has helped keep U.S. government debt so cheap to finance and the spread immediately shrunk.

This is one reason why mortgage rates fell Monday and why they should continue to stay low over the near-term.  With the U.S. government backing the mortgage market, there's no room for the risk premium that helped keep rates high this past year.

It doesn't mean more people will qualify for conforming home loans, but for the ones that do, financing should be cheaper.

Recognizing Opportunity

Stamp Quotes I
Originally uploaded by sgs_1019

In the current real estate market, there are some buyers who have a need but haven't taken the steps to move towards a purchase. Concerned by the articles written about areas like California, Nevada, Arizona, and Florida, they wait for someone in the media to tell them that they can buy a home and benefit from the experience.

Others are taking steps to buy, realizing that the combination of low interest rates and adfordable housing is creating an opportunity to buy now that may not be available later - or that they may end up spending more for less huse if they wait for someone to signal that the market is better -

Which one are you?

Government Takover Lower MOrtgage Rates

Sunday, the U.S. government assumed control of Fannie Mae and Freddie Mac.

The papers have done a terrific job talking about the political perspective of the takeover, and the economic perspective of the takeover, but very few people have addressed the key news for homeowners.

Mortgage rates are plummeting.

The reason why mortgage rates are falling post-takeover is because of Fannie Mae and Freddie Mac's collective role in the U.S. mortgage market.

1. They guarantee about half of the nation's $12.1 trillion in mortgages
2. They purchased and securitized four-fifths of the nation's home loans as recently as six months ago

See, earlier this year, Wall Street punished Fannie Mae and Freddie Mac for their weak balance sheets and large numbers of delinquencies.  This led to Wall Street to raise the borrowing costs for the two firms across the board which, in turn, led to higher mortgage rates for Americans.

But today, with their balance sheets backed by the U.S. government, Fannie and Freddie are now viewed as "safe" by the eyes of Wall Street. 

This has lowered their borrowing costs, pushing down mortgage rates for the four-fifths of the country that is currently channeling their home loans through Fannie or Freddie.

(Image courtesy: The New York Times)

Mortgages Rates Benefit from Unemployment Data

On the first Friday of every month, the government releases its Non-Farm Payrolls report.

More commonly called the "jobs report", the two-page analysis examines the nooks and crannies of the U.S. economy to see which industries are hiring and which are firing.

The August jobs report was released last Friday and it shows that the U.S. economy shed 81,000 jobs in August.

This marks the eighth straight month in which payrolls declined and puts the annual job loss total at 605,000. The Unemployment Rate jumped to 6.1% -- its highest level in 5 years.

For American workers, this is bad news. But, for American home buyers, the news couldn't be better.

Mortgage rates are improved this morning on the weak jobs data.

If this seems counter-intuitive, remember that earlier this year, lingering concerns about inflation in the U.S. economy caused mortgage rates to rise to their highest levels in more than 5 years.

Lately, however, those fears are subsiding and as today's jobs report shows worse-than-expected weakness, it's one more reason for markets to put inflation concerns to rest. With fewer Americans working, there are fewer dollars are available to propel the economy forward, after all.

So, today's jobs data is good for mortgage rates because it reduces inflationary pressures on the economy and as inflation levels fall, mortgage rates tend to do the same.

Lower rates mean more affordable housing payments each month.

(Image courtesy: USA Today, The Wall Street Journal)

Real Estate Definitions; Home Inspections

A home inspection is a complete, top-to-bottom, visual check-up of the structure and systems of a house.

It is meant to be an objective determination of a home's condition.

A home inspection usually takes 3-6 hours to complete, depending on the size of the home.

During the inspection process, the inspector will examine all of the following components of a home:

• Home exterior including doors, decks, and vegetation
• Heating and cooling systems for leaks and efficiency
• Electrical systems for safety and soundness of design
• Plumbing systems for venting, distribution, and drainage

In addition, the inspector will review the roofing system, the home's interior, and several other parts of the property.

A home inspection may be ordered by a home owner or by a home buyer.

For a home owner, an inspection can detail a home's shortcomings and provide a roadmap for repairs. This can help a person prepare his home for sale because "major issues" can be addressed in advance of listing.

For a home buyer, a home inspection physically reviews a home under contract, identifying structural flaws that may impact the home's desirability. This is essential for the negotiation process because no home is "perfect" -- even new ones!

A home inspection highlights potential long-term trouble spots and the likelihood for expensive home repairs. This is why real estate professionals often recommend inspecting a home immediately after signing a purchase contract.

To find a qualified home inspector in your area, ask your real estate agent for a referral, or visit the American Society of Home Inspectors Web site. Bear in Mind however, the Home Inspectors in Pennsylvania are not licensed or regulated, and are merely bound by the rules and regulations of the professional societies they belong to. Be sure that your inspector carries Errors and Omissions Insurance for your protection.

Source
American Society of Home Inspectors
Frequently Asked Questions on Home Inspections
https://www.homeinspector.org

(Image courtesy: Anderson Home Inspections)

When I don't Disagree with Case-Schiller's Price Index

I don't usually like the Case-Shiller Home Price Index because it doesn't include our Metropolitan Statistical Area, and without data from Philadelphia (which is usually better than most parts of the nation) I don't think the study can have validity to us, But even with their poorly weighted (IMHO) information, it seems that we may have hit the bottom of the real estate market in many parts of the country.

According to the June 2008 Case-Shiller Home Price Index, home prices in 15 of the 20 largest U.S. real estate markets either improved, or showed growth from the month prior.

This is the fourth straight month in which that happened which means that a national housing recovery may already be underway.

Now, it's worth stating that all real estate is local and that there's no such thing as a "national real estate market", but for home buyers looking to to maximize their negotiation power to get the best possible "deal", spotting trends like this before the media does is a good thing.

So far, only Bloomberg and a few others have chosen to highlight the positives from the otherwise-negative Case-Shiller report. By contrast, most publishers are focusing on annual home price figures which show a hefty drop of 15.9 percent.

We shouldn't dismiss annual trends because they're helpful in the theoretical sense, but for real, live home buyers trying to identify trends and market bottoms, it's the month-to-month data that matters most.

After looking at 4 consecutive months of Case-Shiller data, the month-to-month data appears to show that home prices have stabilized in most major markets. And, in some, they've already started to recover from their lows.

Source
U.S. House-Price Slide Eases, S&P/Case-Shiller Shows
Courtney Schlisserman
Bloomberg.com, August 26, 2008

How Labor Day can Effect Housing Affordability!

As we get closer to Labor Day, volume on Wall Street is dwindling as market players get a head start on their long weekend.

Today could be a difficult day to shop for mortgage rates and that can impact home affordabilility. 

Expect volatility.

This is because mortgage rates are based on the price of mortgage bonds and, on Wall Street, bonds trade a lot like stocks.

There has to be a buyer and a seller at a specific price to make a deal.

With so many traders on vacation today, though, there are fewer opportunities to match buyers and sellers.  This can cause mortgage prices rise or fall faster than on a "normal" day, directly leading to mortgage rate volatility.

Each 0.125% mortgage rate increase is an extra $96 cost per $100,000 borrowed on a principal + interest home loan.

For a light-volume trading day, there is a lot of information for markets to digest:

• The weather reports on Tropical Storm/Hurricane Gustav
  
• Reports that inflation is rising
  
• Reports that Consumer Spending is slowing
  
• Ongoing political tension between the U.S. and Russia

By themselves, each of these points can move markets. Together, however -- and aided by Labor Day -- they can move markets a lot.

Mortgage bond pricing is fluid, changing every minute of every day.  Today, those changes will be exaggerated and, as an example, in the first 30 minutes of trading, mortgage rate pricing swung from rate improvement to rate deterioration in a flash.

More Proof Real Estate is Local!

Stories on TV about the national real estate market are misleading to Americans.

This is because there is no such thing as a "national real estate market".

Consider the latest American Housing Survey. It found that there are 124,377,000 homes in America spread across:

• 50 states, with
• More than 30,000 incorporated cities, and with
• An innumerable number of neighborhoods

And yet, the media repeatedly groups all 124 million homes into one giant lump and then gives an analysis. No matter how you slice and dice the data, a home in Oregon can't be compared to a home in Mississippi.

This is why national real estate statistics are somewhat useless.

To get real estate analysis that matters, look local instead. And I don't mean stats from your state -- I mean stats from your neighborhood. It's the only way to know what's driving home prices on your street.

Unfortunately, finding local data like this isn't easy; it's far too narrow to be covered by the press. So, the best place to get local real estate data is from a local real estate agent or from somebody else with access to raw real estate data in and around your neighborhood.

By talking to "in the market" professionals that know your backyard, you'll get a much clearer picture of your local market -- good or bad -- than the national media could ever provide.

Real estate is a local market so your real estate data should be local, too.

Homeowners Benefit from Lower Housing Starts!

Housing Starts measure the number of new housing "units" on which construction has started and in July, Housing Starts fell to its lowest levels since March 1991.

For homeowners, this is a welcome bit of good news because as fewer homes are built, there is less inventory from which home buyers can choose, making their homes a more important part of the existing home inventory.

With fewer homes for sale, the supply-and-demand curve shifts in favor of home sellers and this adds a support floor for home prices. In addition, with less new construction , those homes built in the past few years become more attractive to potential home buyers who are looking for the newest home possible.

For home buyers, though -- and for the opposite reason -- the low number of Housing Starts may not be as welcome.

With fewer new homes on the market, owners of "used" homes may feel less pressure to lower their asking prices or to make other concessions to interested buyers. This means that home buyers may pay more for a home, or get fewer "throw-ins" on the contract.

For all of the hocus-pocus that surrounds real estate data, in the end, home prices are based on the supply of homes versus the demand for homes. When supply outpaces demand, home prices fall.

Homebuilders learned this lesson and July's Housing Starts data supports that.

(Image Courtesy: Wall Street Journal Online)

How Your Purchasing Power Just increased!

The Producer Price Index is a business inflation meter and it's now up 9.8 percent annually.

This is a huge number for PPI and represents the highest year-over-year rate of inflation since 1981.

Normally, blowout inflation like this would be terrible for mortgage rates but mortgage markets are actually improved since last Tuesday's data release.

Usually, a rocketing PPI would create an inflation expectation on Wall Street which would, in turn, cause mortgage rates to rise, impacting home affordability.

Yesterday, however, that's not what happened.

Upon the PPI release, Wall Street looked at the 9.8 percent number and simply shrugged it off. "Of course PPI is high," traders thought. "Did you see how high energy costs were last month?"

Traders know that in July, oil prices reached an all-time high of $147.27 per barrel and, since then, crude is down more than 20 percent. Because of this, Wall Street has now turned its attention to the August PPI data, thinking it will much more calm than July's.

In other words, instead of fearing inflation, traders believe the worst of it is over, providing an unexpected boost to home buyers in need of mortgages. As inflation expectations fall, mortgage rates are following suit.

"Getting" the Pending Home Sales

When home sellers accepts a contract on MLS-listed property, the property's official status changes from "Active" to "Pending".

By measuring the number of "Pending" homes nationwide, the National Association of Realtors^® publishes its once-monthly Pending Homes Sales Index.

The real estate industry group positions the report as a predictor of future home sales activity, stating that 80 percent of homes under contract will "close" within 60 days, and most others will close within 120 days.

But, although using the Pending Home Sales report as a crystal ball may be its intended use, it may not its best use. 

This is because of the index's methodology:

1. It doesn't measure new construction homes
   
2. It doesn't track For Sale By Owner properties
   
3. Its sample set covers just 20 percent of MLS transactions

In addition, in a tough mortgage climate such as the one we're in now, a greater percentage of pending sales will fail to close at all because of lack of financing.

The Pending Home Sales Index still has its place, however -- it's a terrific look at the buy-side demand for homes. 

When the Pending Home Sales Index is rising, we can infer that more buyers in the market for homes and this is a signal of market strength.  After all, pending sales can't happen unless there are buyers out there.  And with more buyers competing for homes, home prices tend to rise.

This is why the June's Pending Home Sales report is so intriguing. 

In June -- for the second time in three months -- the Pending Home Sales Index posted a large gain even as economists were calling for a loss.  The inference here is that buyers are not only finding good value in all four regions of the country, but are willing to make bids on homes listed for sale.

Now, again, the uptick doesn't mean that the pending sales will necessarily close, but it does tell us that more home buyers are finding "now" to be a good time to buy real estate.

That sort of insight is what make the Pending Home Sales Index worth tracking.  When buyer demand is rising, the real estate market isn't usually far behind.

Leaky Toilets Cost Fortunes!

Any plumber will tell you -- toilets are among the least efficient appliances in a person's home.  20 percent of them leak up to 200 gallons of water per day -- the equivalent of an 80-minute shower.

At an average cost of $2 per 1,000 gallons, the EPA estimates that homeowners literally flush $146 of water down the drains each year.

But toilets also waste money by overfilling with water; even low-flush varieties waste 32 ounces per flush.  Because of overfills, an average household of 4 people with 2 toilets squanders an additional 6,575 gallons of water in a calendar year, or $13.15.

Enter the $15 HydroClean toilet valve.

Built by a plumber, the HydroClean product prevents toilet overfills, detects leaks, and cleans the toilet tank for you.  It installs in 5 minutes and the Web site says no special skills are needed.

Within the next 5 years, 36 states expect to suffer water shortage.  Using HydroClean, you can help conserve water and conserve dollars.

HydroClean is available at retail stores and online.

Source
Drinking Water Costs and Federal Funding
EPA.gov, June 2004

Fannie Mae Fees May Increase Buyer Costs

Fannie Mae announced a new risk-based pricing model and additional mortgage delivery fees this week, adding to the cost of buying a home.

Risk-based pricing was first introduced by Fannie Mae this past April. It added new, mandatory loan fees for high-risk borrowers while rewarding a small group of low-risk borrowers with fee credits.

In the updated model, even 720 credit scores with a 20 percent downpayment won't protect mortgage applicants from the risk-based fees and they can range as high as 2.750 percent, depending on credit scores and downpayment size. 

Fannie Mae will continue the practice of rewarding high-downpayment borrowers with fee credits.

Fannie Mae's second pricing change involves the Adverse Market Delivery Charge and it is not risk-based -- it applies to all applicants equally. 

First introduced in December 2007, Adverse Market Delivery Charges are mandatory surcharges on all conforming mortgages.  The fee was initially a quarter-percent.  It's now doubled to 0.500 percent.

Combining risk-based pricing and delivery fees, mortgage applicants have two choices to pay them:

1. As a one-time fee, paid at closing, payable to the lender
   
2. As an interest rate increase, payable month-after-month to the lender

The one-time fee is calculated by multiplying to fee amount by the applicant's loan size and dividing by 100.  The interest rate increase is calculated as a general rule, where each 0.500 percent in fees can be substituted for a 0.125 percent increase to a mortgage rate.

The fees become "official" October 1, 2008, but lenders are expected to deploy them much sooner.

Freddie Mac's SEC Filing : Makes Buying a House In Philly Today's Concern

Sometimes, the hardest part about news is knowing where to find it.

In its filing with the SEC last week, Freddie Mac stated that it will "pursue increases" to its middleman fee. This would likely make buying a home more expensive for every conforming borrower in the country.

The exact verbiage from the filing is extremely opaque and unless a person knew what things like "delivery fees" were, or "bulk and flow transactions", he'd be inclined to skip right over the offending passage, tucked away on Page 72 in a paragraph labeled Business Outlook.

But, if we paraphrase the passage and simplify it for laypersons, it reads something like the following:

We didn't charge enough fees in 2007 to account for the massive number of defaults. We don't plan to make that mistake again in 2008.

Strangely, in the entire 1,394-page filing, this passage is the only mention of "future default costs" leading to more loan charges. In other words, it's easy to see why this story didn't get picked up by the major news outlets.

To the media, the major angle in Freddie Mac's filing was that it registered to sell $10 billion worth of securities. For everyday Americans, though, the major story was a different one -- mortgage fees may never be as low as they are today.

Therefore, if you know that you'll need a new, conforming home loan soon -- for either a home purchase or a refinance -- consider moving up your timeframe. Whether rates rise or fall, it's likely you'll pay a more money to borrow money only because you waited. And combined with Philadelphia's rating by Forbes Magazine as one of the 10 Best Places to Buy in the US, going out and finding the right home today is the smart move.

The implied fee increase would be the third this fiscal year, following increases in December 2007 and in April 2008.

First Time Buyers to Receive Tax Credits up to $7,500

Photo Courtesy of Creativecommons.org

The President signed into law the Landmark housing legislation yesterday. The law is designed to help the housing industry and the credit industry recover from the mortgage melt-down of the past year, and provide stability in the financial markets. Those portions of the bill are important, but some sections of the law impact first time home buyers in a manner they will immediately feel.

One part of the bill does impact "the average buyer" immediately in an important manner. This portion provides a tax credit of up to $7,500 for first time home buyers, whose individual incomes are less then $75,000 or married couples who earn less than $150,000 jointly. The tax credit can be used for homes purchased between April 9, 2008 and July 1, 2009, and should stimulate home buying, reduce excess supply in housing markets and shore up home prices.

The Tax Credit is based the purchase price of the property, being 10% of the purchase price, up to $7,500 (meaning that for most first time home buyers , the credit will be $7,500).

A comprehensive lists of questions and answers about the tax credit program can be found at the National Association of Home Builder's web site www.federalhousingtaxcredit.com.

Forbes Says Philadelphia is a Great Place to Buy Real Estate

Philadelphia scores once again as a great place to buy property! In a recent article listing the top 10 cities to buy a home published by Forbes magazine, Philadelphia ranked as the fourth best place to buy a house in the U.S.

In this Forbes article, the ranking was determined by the cost of buying versus renting, tax incentives where present, and whether a buyer would have an opportunity to build equity. Forbes surveyed the 40 largest metropolitan area housing metrics looking for cities where [rices have appreciated over the last two years. It also measured vacancy rates, providing extra points where rents are significantly higher than a buyer's mortgage payment for the same home. Houston and Austin took the top 2 spots, due to their healthy job market and growing tax revenues.

Philadelphia's place was earned due to price stability, increasing rents and affordable housing stock.

Its a story you may have read here before, but its certainly nice to have an outside validation of my ongoing opinion that our marketplace is one of the really good buys around the country.