Loan Rules Tighten

Not that long ago, outbidding on properties was common practice with “jumbo” loans—over $417,000. Homes on the market now have became abundant, the sub-prime meltdown has led to tightened lending even for credit-worthy borrowers, including shoppers in their price range who needed so-called jumbo loans.

Lenders recently started to shun these larger deals that, according to Andrew LePage, an analyst with Data Quick Information Systems, accounted for almost 40% of purchase loans in Southern California in the first seven months of 2007. Last month, Southland home sales dropped to their lowest level for any August since 1992 as buyers, sellers and lenders held back in the uncertain market and deals slowed or stalled

Some lenders are slowly starting to return to business, but the rules have changed for borrowers: They need much brighter credit scores, a fuller financial profile and larger down payments. Plus, buyers can expect to pay higher interest rates than they did just a few months ago.

Among the changes, many lenders have backed away from 100% financing; when it is still offered, the terms are much more restrictive.

"I like to tell people that 90[%] is the new 100," said Barry Kaye, a Beverly Hills-based mortgage industry consultant. And the deposit needed on a loan of up to $1 million has gone from 5% to 10% in the last year, he said, assuming the borrower meets the new lending criteria. The changes are being felt largely by those seeking homes costing roughly between $800,000 and $2 million, he added.

New strategies in putting deals together are beginning to show up, including
sellers paying points to buy down the buyer's interest rate, making deals contingent on buyers first selling their homes, or even more modest incentives such as paying off homeowner association fees.

“Once, a selection of widely available loan programs that existed, have disappeared or now require larger down payments, higher credit scores and more thorough income and asset documentation, said Ed Craine, vice president for the California Assn. of Mortgage Brokers. "Some people have found the original loan they qualified for no longer exists."

It is still possible to borrow, though that may require a little extra effort.

"Things are in a pretty bad way right now," said Brian Martucci, head of online mortgage broker GetLoans.com, who believes the situation will become much worse before it gets better.

Martucci, based in Washington, D.C., sees more lenders going out of business and a growing supply of homes as a result of foreclosures, developers who overbuilt and buyers who can't find financing.

He predicts it could be another year until the full extent of the foreclosure crisis is known and even longer before the lending market regains its momentum. "There's a lot of unwinding to come. We're all heading for the same pain."

Locally, Gary Bluman, owner and president of Real Estate Resources, based in Brentwood, takes a more sanguine view.

"We're telling our clients that based on history, values will come back and that now is a good time to buy for the long term," he said. "We're not expecting a big slump."

CAN YOU BELIEVE, “St. GREENSPAN” DIDN’T KNOW?

Even Allen Greenspan didn’t realize the danger to the nation’s economy as a result of faulty mortgage loans. As Chairman of the Federal Reserve, wouldn’t mortgage fall under his watch? His explanation is in “Fed Speak,” as are all communications from the Federal Reserve.

As I understand it, the idea behind the Federal Reserve is to keep things running smoothly, so banks that are members of the Fed are federally insured, which should be reassuring to depositors. It seems that there were fraudulent practices that were swept under the rug: the Feds ignored, lenders denied, and borrowers are now hung out to dry with.

So now we discover that Allen Greenspan may not have been the financial genious he was thought to be. His explanation: ‘It’s difficult for regulators to control.’ And unfortunantly it seems his replacement is proving no more helpful controlling the mortgage loan business than he was.

As home buyers and sellers ponder what to do next in today's volatile real estate and money markets, the conflicting opinions of industry professionals may not offer much help. Greed, the original raison d'être, continues to triumph.

A number of loan programs, once widely available, have disappeared, or now require larger down payments, higher credit scores and more thorough income and asset documentation. Some people have found the original loan they qualified for no longer exists.

Credit tightening at the jumbo end of the market, means agents are having to learn "different ways of putting deals together." Deals that include sellers paying points to buy down the buyer's interest rate, making deals contingent on buyers first selling their homes, or even more modest incentives such as paying off homeowner association fees.

It looks like the borrowers and their lenders are proving more creative than the Feds when creating a means of dealing with this conundrum.

Chicago Considering Adopting Paris Self-Service Bike Scheme

Chicago? (Kind of hard to get around in the snow with a bike. And the humidity without A.C. might be unbearable at times.)

How did the South Bay (So California, USA) overlook this opportunity to put a major dent in the areas of horrendous gas consumption, and to help get the absurd gas guzzling vehicles off the road. After all, who needs $40,000-plus ego satisfying vehicles for transportation? The French know how to do it...small cars are derigueur. (The price of petrol may have something to do with this.)

But this aside, bicycles are practical. Parking isn't a problem, the cost of renting is far less than gas, and vehicle cost is eliminated. And of course, there is no pollution.

In Paris it works like this: Riders can pick up a bike at any time of day or night, after lodging a 150-euro safety deposit. The first half hour is free, with prices rising to one euro (1.4 dollars) for every extra half hour.

The "Velib" scheme in Paris has 10,000 bicycles at 750 hire points dotted around Paris, with plans for 20,000 bikes at 1,400 hire points by year end.

Residents of the South Bay pride themselves in physical fitness and outdoor sports. Here’s a plan with fascinating possibilities. (Of course freeway use is not recommended.)

So What’s the Federal Funds Interest Rate? What's the Discount Rate? How Does This Affect Housing?

The Federal Reserve rate cut last month was the Discount Rate, not the Federal Funds Interest Rate. What’s the difference and how will it affect housing?

The way it is described on financial news sites is unintelligible. In simple terms,
1- The discount rate is designed to improve liquidity for the banks themselves.
2- The federal funds interest rate is designed to improve or limit liquidity or access to credit for consumers.

The Federal Reserve is the bank of the federal government, and as such, regulates monetary and credit policies such as buying and selling securities, setting the cost of credit (interest rates,) how much money is available to banks for borrowing, and how fast and at what rates the money has to be repaid.

Federal Reserve is designed to keep things running smoothly, thus banks that are members of the Fed are federally insured, which is reassuring to depositors.

To accomplish the flow of money, The Fed operates 12 regional banks, who monitor the economy and loan money to "member" depository banks -- (member FDIC.)

There are two ways banks can borrow money using Fed-insured funds. They can borrow money directly from the Fed using the "discount" rate, or they can borrow from each other using the "federal funds" interest rate. Both are short-term or overnight rates.

The discount rate is designed to improve liquidity for the banks themselves. The federal funds interest rate is designed to improve or limit liquidity or access to credit for consumers.

Last month, the Federal Open Market Committee (FOMC) had just met and decided not to raise or lower federal funds rate, leaving the 5.25% funds rate in place for the ninth meeting in a row. But after the Fed cut discount rates, many pundits believe that the next time the Fed meets, in September, the FOMC will vote to lower key interest rates by 25 to 50 basis points.

The expanding liquidity means that mortgage rates are likely to drift downward, which will make buying a home more affordable in the short-term.

HOW TO DO A SHORT SALE

A real estate short sale occurs when the outstanding obligations (loans) against a property are greater than what the property can be sold for.

STEPS:

1 - Verify value of your property, either through an agent, or do your own analysis of the area.

2 - Determine all costs of selling. If using an agent, he will provide this. If selling property on your own (for sale by owner), call a local title company or real estate attorney and ask, as a seller, what the closing costs will be.

3 - Determine the amount owed against the property. This will be the total of all loans against the property.

4 - Do the calculations. Subtract the total amount owing against the property from the estimated proceeds of the sale. On a short sale, this will be a negative number.

5 - Contact the lender or lenders. Talk to a supervisor or manager if possible; this person will have the authority to handle your request. Determine what their procedures are for a short sale. Some lenders are willing to work with you. In any event, your debt is your responsibility.

6 - Sell the property.

ADDITIONAL CONSIDERATIONS:

= Keep in mind there are closing costs: title and escrow fees, attorney fees, a portion of unpaid property taxes, re-conveyance fees, notary fees, delivery fees, documentary fees and/or transfer fees.

= If you sell the property without the assistance of a real estate broker, you will save the amount of the commission and have more to apply toward paying off your loan.

= Remember that the amount on your monthly loan statement does not include interest. Interest is accrued until the date a loan is paid off, so you may have as much as 30 days of interest on top of the balance owing, and you'll need to include this interest in the total payoff amount.

= If a property is sold under a short sale, the lender may require the buyer to make up the difference, either through a personal obligation or a collection.

= The IRS often gets involved with short sales, because they are seen as a relief of debt and may be treated as income. Check with your accountant.

Bernanke out of synch with Mortgage Market Problems

From what I gather from snooping around the internet, the Fed's injections of short-term liquidity have succeeded in preventing the equivalent of a bank run, but otherwise...zero.

At the same time, high-quality borrowers have more credit than they need. The problem is credit quality, not liquidity.

The financial world has been waiting all week for a speech just delivered by Fed Chairman Ben Bernanke. He has been noticeably silent concerning the matter of Mortgage Market Problems. And, when he does speak...not a clue.

His speech begins with three pages describing the current situation as reported by daily newspaper content. For example: "Obviously, if current conditions persist in mortgage markets, the demand for homes could weaken further, with possible implications for the broader economy. We are following these developments closely." Wow, why didn’t I think of that?

The Chairman might have noted the crucial elements of liquidity created than whose absence in modern structured finance have caused today's wreck. He might have noted creative solutions to the dangerous quagmire at hand are offered by ingredients such as transparency, homogeneity, underwriting, credit guarantee.

As I understand it, If every mortgage made since 2000 had been underwritten strictly within the guideline of the Street inventor/securitizer/buyer, today's problem would be undetectably smaller. Subprime loans are deadly by structure, not slipshod or fraudulent processing.

Rather than offer creative solutions to the problem, Bernanke closed with a paragraph assigning blame for bad mortgage lending: "... Most loans are securitized, and originators have little financial or reputational capital at risk. ...

"In light of recent financial developments, economic data bearing on past months or quarters may be less useful than usual for our forecasts of economic activity and inflation. Consequently, we will put particularly close attention to the timeliest indicators, as well as information gleaned from our business and banking contacts," ...???.

In other words, the Chairman doesn't have a solution, or am I dense?

As far as blame goes for the idiotic mess real estate has put the country in, one must ask who the lenders were allegedly controlled by as the perfect wave grew. Consumers wanted more than they could afford at any cost, and lenders created bizarre loans to accommodate them...for a profit. And no one was watching the store?

On a positive note, President Bush is making it possible to renegotiate loans at lower fixed rates.

The South Bay:
Homes,RealEstate,ElSegundo,ManhattanBeach,HermosaBeach,RedondoBeach,Torrance,PalosVerdes,
90245,90266,90254,90277,90278,90503,90504, 90505,