Helping or Hurting?

Missed this one a few weeks ago, but it's worth a trip back in time. New appraisal guidelines are making it harder than ever to get financing for a home purchase. These days, anti-reform and anti-regulation stances are less popular than ever, but reform for reform's sake can backfire.

In our sphere, we've heard innumerable stories of local appraisals being done by out-of-area appraisers. (Mill Valley house, Sacramento appraiser. San Francisco condo, Morgan Hill appraiser.) We talk often about the importance of working with a Realtor who really understands a local market. Well, that wisdom gets severely compromised when an out-of-area appraiser can step in and blow up a transaction.

So is this a good thing or a bad thing? Are regulators protecting us from ourselves or are they preventing the market from recovering?

Rising Tide?

If a rising tide lifts all ships, then what do rising interest rates do? Unless, like us, you assiduously avoid television news and talk radio, you've already heard about Fed Chairman Bernanke's comments regarding eventual and inevitable increases in interest rates. Here's the article about it in the Times. When rates go up, lots of things will happen; some bad and some good and all depending one your point of view. But they won't all happen at once and they won't all happen right away. One thing we think we can say with relative confidence...if you're thinking about buying and you plan to hold on to your investment for a good long while, this might be the time to act. Conforming loan rates are under 5%. Even if prices fall, higher rates will mean higher cost of ownership over the long haul. Unless you're a cash buyer, you may look back on Q1 of 2010 as that rare moment when prices and interest rates were both low.

ARM and a Leg

If you visit us regularly, you know about adjustable rate mortgages; the pros and the cons. You may not, however, know about Option ARMs. This clever lending product is what made it possible for many not-so-wealthy people to afford very expensive homes in the Bay Area. In a nutshell, Option ARMs offer different payment options. The first option is a "full" payment of interest and principal. Option two is an interest-only payment. Option three is some amount less than the monthly accruing interest; a negative amortization payment.

Option three has the potential for big problems.

When you aren't paying even the total interest on your loan, you better hope your home's value is going up. Otherwise, you have no chance to build equity. For the last 2-3 years, as California home values have fallen, borrowers choosing option three have been falling farther and farther behind. Many are now well "upside-down" on their homes.

And that's not the scariest part. Like all ARMs, Option ARMs have lower initial rates. After a few years (usually three or five), the rates re-set. This means that all three payment options can go up. Borrowers who could only afford the negative amortization payment find themselves struggling to pay even that amount. And guess that happens?

Default. And guess what follows default?

Foreclosure.

Read this article from the Chron for some stats. To us, the scariest number is not the 50,000 or so Option ARMs floating around the Bay Area. No. It's the 94% of borrowers who've been making the minimum payment.

It will be interesting to see if another wave of foreclosures is on the horizon.

On My Soap Box

Ordinarily I try not to choose sides in the mortgage crisis debate. Was it caused by irresponsible borrowers, unscrupulous lenders, greedy investors? Short answer, yes. There's more than enough blame to go around.

But when I read an article in the Times yesterday morning about mortgage service companies dragging their feet on loan modifications because they can make more money from delinquencies and foreclosures...well, my stomach turned.

As many of you know, many home loans are owned by investors, but serviced by mortgage servicing companies. These companies collect and disburse payments and, among other things, notify borrowers who are in default. They also are responsible for negotiating loan modifications and/or short sales for borrowers in distress. While the new Obama administration plan offers financial incentives for mortgage service companies to modify loans for borrowers in distress, the Times article reveals that they can make far more money by allowing borrowers to languish in default.

We happen to know people who are working to get their loans modified. While these people are not clients of ours, they have sought our advice as friends and professionals. I have been amazed (though not surprised) by the challenges they've faced. It is all but impossible even to get a mortgage service representative on the phone. I chalked this up to gross understaffing are mortgage service companies coupled with the backlog of borrowers seeking relief. It appears that the reasons may be far more insidious.

A Little Perspective, A Lot of Opportunity

A buyer said to me the other day, "It's a shame that now that prices are finally down, interest rates have gone back up." This sent me scurrying for some historical data. The buyer was happy to be reminded that while, on a regional basis, many sellers are more willing than ever to negotiate, 30-year fixed rates are still relatively low, typically below 7%.

A quick snapshot of some historical interest rate climates:
In 1983, the 30-year fixed loan rate was 13.95 percent
In 1987, the rate was 11.36 percent
In 1992, rates dipped below double digits to 9 percent
In 1997, the rate was 8.27 percent
In 2002, the rate was 7.16 percent

As is so often the case, investors willing to go against the grain, to enter a market many are leaving, may be rewarded for their courage down the road.

Just some thoughts for those trying to make sense of a confusing market...

You Never Forget Your First time

Next Generation Real Estate is getting blogged down. And it's about time!

Welcome to our latest resource for clients, friends, relations, and people with too much free time at work. Check back often for timely reports on the state of the Bay Area real estate market, as well as updates on the lives of your favorite intergenerational real estate team.