With a Realtor on your side, you know you’re covered…

Know risks before waiving a financing contingency

Low appraisal can be bad news for buyers

Dian Hymer, Inman News, Monday, June 18, 2012, link


<a href="http://www.shutterstock.com/pic.mhtml?id=3601160" target=blank>Real estate finance</a> image via Shutterstock.Real estate finance image via Shutterstock.

Certain situations can steer buyers off the recommended course of action when making an offer. One is a multiple-offer competition. Another is stubborn sellers who buyers are trying to soften up enough to agree to sell them their home.

Normally, unless the buyer has all cash and doesn’t need a mortgage, a purchase contract will include a contingency for arranging financing. The contingency is pegged to a deadline, often two to three weeks. Sometimes it can take longer, depending on the complexity of the buyers’ financial situation and the backlog in the lender’s underwriting system.

In order to approve a loan, the lender needs a copy of a purchase contact signed by the buyers and sellers, a satisfactory search of the title record, an acceptable appraisal of the property and acceptance of the buyers as creditworthy to borrow the amount they are requesting.

If the buyers try in earnest but aren’t able to satisfy the above conditions, their deposit is usually refunded and the house goes back on the market. An offer that doesn’t include this protection for the buyers is attractive to most sellers.

HOUSE HUNTING TIP: The ease with which you’ll be able to gain confidence that you don’t need a financing contingency has to do with the lender or mortgage broker you choose to work with. For instance, if you bank with an independent bank that holds a lot of your money and knows your cash flow situation, you’ll have less to be concerned about than if you’re working with a big institution that doesn’t know you and has a multilayered, inefficient underwriting procedure.

Some buyers who are well-qualified to support monthly mortgage payments have been turned down by banks for foolish reasons. For example, one man wanted to refinance to a lower loan amount after selling a multimillion-dollar business. His credit was pristine. The lender didn’t like that he didn’t have an income. He went to an independent bank that was happy to have his business and they did the loan.

Appraisals pose another set of problems. If the appraisers are unfamiliar with the local market, their appraised value can be way off, usually on the low side.

Lenders loan money based on the appraised value of the property, not on the purchase price in the contract. A low appraisal can pose a problem for the buyers if they aren’t protected by a financing contingency.

For example, let’s say a lender has agreed to loan you 80 percent for the purchase of a $500,000 home as long as you make a down payment in the amount of 20 percent of the purchase price. If the home appraises for $450,000 instead of $500,000, the lender will probably still give you a mortgage for 80 percent of the appraised value, but the loan amount — $360,000 — is $40,000 shy of what you need to make the deal at $500,000.

If you were protected by a contingency, you could withdraw without penalty or try to negotiate a price reduction with the seller. Without a contingency, you could lose your deposit if you back out of the deal based on the low appraisal.

A fluctuation in current market value has an effect on comparable sales prices. Last month’s comparables may be out of sync with current pending sale prices, increasing the odds that a listing might not appraise for the contract price.

In the Silicon Valley area of Northern California, the inventory is so low and incomes so high that listings are sometimes selling for hundreds of thousands of dollars over the list price. Some listing agents make sure the appraisal contingency is waived before an offer is accepted to protect the seller from a failed transaction.

THE CLOSING: Before waiving a financing contingency, make sure you understand the risks you may face.

Owning a home – good for your wallet and good for the soul…

3 unexpected upsides of homeownership

Mood of the Market

Tara-Nicholle Nelson, Inman News,  Monday, June 18, 2012, link


<a href="http://www.shutterstock.com/pic.mhtml?id=51825523" target=blank>Homeowners painting wall</a> image via Shutterstock.Homeowners painting wall image via Shutterstock.

Lately, I’ve been surprising myself at how often I hear myself reference an event that happened 20 years ago or describe a dear friend as having been my “bestie” for the last decade. But there was no denying that I’m a bona fide grown-up when last year I got a note in the mail announcing my 10-year reunion — for law school, not high school!

Having moved to the San Francisco Bay Area specifically to go to law school, this means that I’m staring down my 15th year in the area; and having bought my first home just months after graduation, I’m looking at my 10th year of homeownership — though I’ve owned three different homes in that time, they’ve all been within the same metro area.

And it strikes me that, besides the obvious tax and long-term financial advantages of homeownership, I’ve become conscious of some of the less obvious, unintended advantages of owning a home in the same area for a relatively long period of time. I’d like to share some of them with you:

1. New, deeper relationships. I have relationships with neighbors, with local vendors and even with the natural beauty of my area that I likely would not have if I hadn’t owned my home and stayed in the same place for so long. I say this is an unexpected upside of homeownership because homeownership, especially given the down market of the last few years, has meant staying put, and because many of these relationships only deepen after years and years; I’m finding new depth in them, even now, that I didn’t have two or three years ago.

Some of these things seem relatively trivial, like the fact that I know that my tailor’s Maltese, Momo, leaves her brood at home while she gets to come to work with her mom every day. I know that every May, the private school campus across the street from my house dresses itself up as Hogwarts. I can count on Vernon, the park ranger at the lake, to keep me honest on how many laps I’ve run on any given day — and to gently relocate any snakes I happen to encounter en route.

Angelina at my favorite restaurant? She knows my order as soon as I give my name on the phone: No. 64 — no tomatoes, no onions.

Collectively, these sorts of relationships, not to mention those with my neighbors, are not trivial; in fact, they are part of what makes home feel like home. So are all the nooks and crannies of my street, the hidden spots and stairs and secret spaces that took me years to discover. And I’m not saying that a very long-term renter could never develop such relationships or have such discoveries, but I know these people are part of my commitment to the area that is intertwined with my experience of homeownership.

2. The ability to customize your home with your personality and your life as they change. When you own a home, you can tailor it precisely to whatever is going on in your life at any given time. The same backyard in which your kids’ playhouse and ball games take place when they’re 10 can quickly be repurposed for your vegetable garden and outdoor living room when they go to college. You can morph your family’s den into a chic dedicated office or yoga room as your needs change — or your man cave can convert into a nursery, as the facts require. To some extent, renters can put different furniture in rooms over time as they need to, but most (wisely) prefer not to invest serious cash into truly converting or remodeling rooms in homes they don’t own.

3. The ability to leverage your space. I’m not talking about refinancing, pulling cash out or flipping your home when the market goes up. Rather, I’m talking about how, if push comes to shove (or if you just have extra space), you can rent a room, a floor or the whole place out, for a night, a season or a year.

I’m talking about the writer I know who dog-sits while she works, letting her little canine charges run amok in their homes and yards and earning a side income at the same time.

I’m talking about the ability to put a pin in your place in the market, continuing to grow your equity and harvest your homeowner tax advantages, while you explore adventures by renting out your home or even trading it with another homeowner across the country (or the globe).

Owning a home is not for everyone, and it has definite pros and cons. But as I embark on my 10th year of homeownership, I wanted to share some of the unexpected upsides I’ve encountered with you.

It’s a seller’s market – time to spruce up!

Cheap ways you can increase your home’s value

Do your research before starting that project to know what buyers want

Bethany Lyttle, Forbes, June 8, 2012, link

Image: Backyard

Houlihan Lawrence Inc.

Create multiple seating areas. An empty stone terrace becomes an instant second dining room with the addition of patio furniture.

Selling your home this summer? Cheap tweaks can pay off big-time. “And even when these don’t equate to big dollars, they may help sell your property faster,” says Adam Hade, an associate broker with Houlihan Lawrence in southeastern New York state.

But choosing which improvements to make is where many homeowners go wrong, according to Hade. “They over-improve or improve in ways that don’t really matter to the buyers in their particular area,” he says. Exactly the reason you should consult with a qualified realtor in your neighborhood before investing in any improvement projects. They can tell you if buyers are looking for nurseries or extra bedrooms and can actually save you money by preventing well-intended but unnecessary upgrades.

One such superfluous improvement is splurging on high-end kitchen appliances. “While a buyer may appreciate chef-quality ranges or top-of-the-line fixtures, a well-kept lower-price brand will rarely break a deal,” says Hade. “On the other hand, worn carpet, dirty grout and clutter will give the impression that the house is not well-maintained and lacks sufficient storage,” he adds. Details like these make it difficult–and even impossible–for many prospective buyers to envision themselves living there.

A home’s layout is another adjustable feature sellers should take advantage of. Dina Landi of Rebecca Riskin & Associates in Montecito, California, suggests reconfiguring your home’s layout to meet market demands. Substituting one room’s use for another is a cheap way to transform a three-bedroom home with a den to a four-bedroom home. Or a home that has a dining room with doors can be reconfigured for use as a main floor master bedroom.

Landi also recommends pausing to inventory all the things you’ve collected over time and reassessing what to keep. As life unfolds, as children grow up, as careers take off, things accumulate. “Taking rooms back to their basics can make a huge difference, allowing a room’s millwork, architectural details, and distinctive details to shine,” she says. The price? Almost zero. All you have to do to make your rooms look bigger is remove pictures, souvenirs, all those stacks of books and magazines.

The best way to improve home values on the cheap is to do what needs doing–and nothing more. Why buy a new ceiling fan when replacing the blades will do? Why paint the entire exterior of your home when touching up any peeling paint will suffice? Taking this approach allows you to make several small improvements instead of taking on just one or two bigger ones. In short: Know your buyers. Choose projects carefully. Know when to quit.

Building to buy – your rent may be helping you…

Using rent payments to rebuild your credit

Tara-Nicholle Nelson, Inman News, Thursday, June 7, 2012, link


<a href="http://www.shutterstock.com/pic.mhtml?id=2835895" target=blank>House built from money</a> image via Shutterstock.House built from money image via Shutterstock.

Q: How can I set up a lease-to-own on a three-unit property and have it count on my credit report? –Bruce T.

A: I’m delighted that you asked this question, for several reasons. There are many, many folks out there who are trying to recover their finances and their credit in the wake of a foreclosure, job loss or other recession-era money trauma. And, though the market has indeed picked up for sellers, there are still many who are struggling to get their homes sold at or near the price they need. A lease-to-own arrangement, more formally known as a lease-option, can be a smart, win-win strategy for both these types of people.

If you have lost a home to foreclosure or short sale, or just have had a rough few years, financially speaking, you may be blocked from obtaining a bank- or credit union-issued mortgage loan for a set period of time, but a seller might still agree to a lease-option. The challenge is that most individual landlords don’t report payments to the credit bureaus. As a result, while you’re making lease payments, your derogatory marks on your credit might fade away, but they aren’t contributing to the sort of positive credit history that you desire.

Some things to consider as you take on this challenge:

1. Understand what specific credit challenge you are trying to solve before you try to formulate the solution. Are you trying to improve your actual FICO score to a certain level? Or are you simply trying to reposition yourself to qualify for a mortgage in a few years? The plain truth is that even if your landlord/seller does report your payments, it still may not increase your numeric credit score, because it is not a conventional credit line that falls within the bureaus’ scoring algorithms.

So, if you’re looking to boost your credit score, rent reporting might not do it. If you are looking to qualify for a mortgage, though, there might be another way to leverage your rent payments toward that end.

2. Know that mortgage lenders might look favorably on your positive rent history even if it’s not reported. Lenders require more than a minimum credit score as a sign of creditworthiness. They also require a minimum number of trade lines, which are simply credit accounts.

For example, a lender might require borrowers to have a FICO minimum of 640 and a minimum of three open trade lines in order to qualify for a given mortgage program. Some lenders and loan programs will allow you to present your lease-option agreement, your canceled rent checks and/or your checking account statements showing your on-time rent payments as a nontraditional trade line account.

If getting another mortgage is your primary objective for having your rent payments reported, talk with your mortgage broker now about the documentation you’ll need to collect for the duration of your lease.

3. If you still want your payments reported, get up to speed on the alternatives. Traditionally, the only rental history items that appeared on credit reports of the big three bureaus — Experian, TransUnion and Equifax — were extremely derogatory items like evictions and court judgments for delinquent rent. However, there are specialized rental reporting bureaus to which property management companies and large landlords, like apartment complexes, report even positive payment records.

Experian recently acquired one of the largest of these, Rent Bureau, and says that Rent Bureau reports are now being incorporated into Experian-reported credit scores. Of course, mortgage lenders typically rely upon the middle of your three bureau scores, so there’s a good chance that the Experian score will not be the one that matters.

But if you are simply trying to document your positive payment history in a formal way, you might consider offering to make your payments through a property manager that reports to Rent Bureau or a similar service, and offer to defray any costs the landlord/seller incurs to do that. Many local landlord associations offer resources that can help.

It’s time to buy! But can you get a loan?

8 scenarios that hurt mortgage qualification

What you should know if you’re divorced or have student loan debt

Jack Guttentag, Inman News, Monday, June 11, 2012, link


Mortgage sign image via Shutterstock.

Do I jeopardize my mortgage application by changing jobs before the loan closes?

Yes. The underwriter approved your application based on your documented income covering two years or longer, from one source. At closing you must certify that all the information in your application continues to be true, which short of committing perjury you won’t be able to do if you switch jobs. Your revised job history will be numbered in days rather than years, which could cause a rejection.

Back in the pre-crisis days, underwriters had discretion to use their judgment in such cases. If the borrower was moving up to a better position in the same field, for example, they would let it go. In today’s market, however, underwriter discretion has been markedly reduced, and the likelihood of rejection is uncomfortably high. The prudent thing to do is to defer the job change until after the loan closes. Nobody will care what you do then.

Will the rental income I receive from renting out my house during part of the year help me qualify for the mortgage I need to buy that house?

Article continues below

No, anticipated rental income cannot be counted as qualifying income unless it is documented in the owner’s tax return for at least two years. Further, only income net of expenses would be counted, and that number would be very small or zero if you expense everything you can in order to avoid taxes.

Can I qualify using my income and my spouse’s credit?

No. Good credit without the means to pay is of little value to lenders, and good income without the willingness to pay is not much better. Lenders require both capacity to pay and willingness to pay in the same person.

Before the financial crisis, married couples who had one spouse with the required income and the other with good credit often took “stated income” loans. Stated income was not verified by the lender. These loans were taken in the name of the spouse with good credit, who stated that the income of the other spouse was theirs. But stated-income loans no longer exist.

Have preapprovals become more useful to homebuyers since qualification requirements became more restrictive?

Yes and no. The main purpose of preapprovals is to establish the bona fides of potential homebuyers to home sellers and their agents, who don’t want to waste time dealing with wannabe buyers who can’t qualify for a mortgage. With an increasing number of potential homebuyers unable to qualify, the value of reliable preapprovals has increased.

However, the same factors that make it more difficult to qualify for a mortgage today also make preapprovals less reliable. This is especially the case with self-employed buyers, who may be rejected despite having been preapproved. Preapprovals are always subject to conditions, the most important of which is a minimum appraised value. If an appraisal comes in below the minimum, the preapproval dies.

As a “nonpermanent resident alien,” can I qualify for a mortgage?

Yes, but the terms are a little stiffer because of the risk that you might be obliged to leave the country. Lenders will require a larger down payment and/or a higher interest rate. In contrast, a “permanent resident alien” suffers no penalty.

Can an excess in appraised value over the purchase price be used to meet a minimum down payment requirement?

No, the down payment requirement is based on the lower of purchase price and appraised value. Any excess appraised value is ignored.

Will sizable student debt prevent my qualifying for a mortgage?

It may if you must begin repaying the debt within the first year of the mortgage, and if the amount is large relative to income. If the payments are deferred more than a year, it is a judgment call by the underwriter who will consider the size of the student debt, your credit and perhaps other factors.

As a divorced spouse who remains liable on an existing mortgage, can I qualify for a new mortgage?

Yes, if your income is large enough to afford the payment on two mortgages. If you can afford a new mortgage but not two mortgages, you must induce your ex-spouse to refinance the mortgage in her own name. Such a provision should have been part of a separation agreement.

The only other possibility is to convince the new lender that the ex-spouse remaining in the house is sufficiently creditworthy that there is negligible risk of your having to meet two payments. That will require documentation that your ex has been making the payments on her own for at least a year.

The bubble clean up continues…

Wells Hands Over Mortgage Records

JEAN EAGLESHAM, Wall Street Journal, May 24, 2012, link

Wells Fargo WFC +0.03% & Co. has handed over hundreds of emails and other documents related to its mortgage-backed securities business to the Securities and Exchange Commission after being taken to court, according to a person familiar with the matter.

The decision by the fourth-biggest U.S. bank to bow to the SEC’s demands for the information resolves a legal spat.

“Wells Fargo continues to believe its disclosures in offering documents pertaining to residential mortgage-backed securities containing Wells Fargo mortgages were proper and appropriate,” a spokeswoman for Wells Fargo said.


ReutersWells Fargo provided the SEC with hundreds of emails and other documents related to its mortgage-backed-securities business.

A spokesman for the SEC declined to comment.

The SEC in March took the unusual step of filing an enforcement action in the U.S. District Court in San Francisco to try to force Wells Fargo to produce documents related to its residential mortgage-backed securities business.

A federal judge in March denied the enforcement order, telling the SEC and Wells Fargo to sort out the issue between themselves.

But the legal action gave a rare peek into the mountains of information being amassed by the SEC as it probes Wall Street’s packaging and selling of these securities. SEC investigators have issued a total of more than 300 subpoenas or document requests to Wall Street firms and others as part of that investigation, officials said Thursday.

Wells Fargo has received six subpoenas, and they show the type of information the agency seeks as it looks to build a case.

At the heart of the demands are data on the pools of loans underlying nearly $60 billion of securities sold by Wells Fargo to investors from September 2006 through early 2008.

The SEC said the subpoenas asked for information on the guidelines on loan quality used by the underwriters to vet the loan pools before they were bundled into securities, the outcomes of those due-diligence checks and the prospectuses used to sell the investments.

The details of its probe set out in the subpoena enforcement action show why the SEC considers this information so important. The SEC said that for “most” of the securities offerings, the checks on samples of the pools found certain loans failed to meet the quality guidelines and were removed.

But the agency added it did “not appear that Wells Fargo took any steps to address similar deficiencies” in the rest of the loans in the pool, before selling them to investors.

The SEC in February told Wells Fargo it planned to file civil charges of securities fraud against it.

The agency also told “two individuals associated with” the Wells Fargo securities that it planned to file civil charges, according to the subpoena enforcement notice. It didn’t name the individuals.

One of the agency’s subpoenas asked for information on the salaries, bonuses and compensation for two Wells Fargo employees, according to the enforcement notice. It didn’t say if the SEC intended to use this information to work out the levels of penalties to seek from those two individuals.

Let us help you figure out what it takes…

What it takes to buy a home

Pat Mertz Esswein, Kiplinger’s Personal Finance, May 25, 2012, link

What it takes to buy a homeLook at your budget and determine how a house fits into it. Fannie Mae and Freddie Mac recommend buyers spend no more than 28 percent of their income on housing costs. (Digital Vision / May 21, 2012)

Tired of renting? It could be a great time to buy your first home.

In many cities, home prices have bottomed and rents have risen. Mortgage rates are still superlow. In fact, homes haven’t been as affordable since 1971. On the downside, in many cities buyers have fewer homes from which to choose and more competition for the best houses.

In Austin, Texas, newlyweds Mark and Ariane Corcoran bought their first home in March. They were renting in a popular downtown neighborhood, where they paid $1,200 a month for a 500-square-foot loft apartment, when they inherited enough money for a down payment. When they began shopping, they expected to buy a classic 1930s Austin bungalow. They found lots of prospects online but drove by most of them.

“Agents are really good at taking photos that exclude what they don’t want you to see, like the used-car lot out back,” said Mark.

They put in an offer on a $225,000, 800-square-foot home. But after the home inspection, they realized that it needed $20,000 to $30,000 in renovations and repairs and that they’d quickly outgrow it. They walked away during the state-mandated rescission period (during which a buyer can back out for any reason and get back any earnest money deposited).

Ariane identified their next prospect within an hour after the listing appeared online. It was a newly built, 1,600-square-foot home with three bedrooms, 2 1/2 baths, and a yard for the dogs. The builder asked $270,000, the couple offered $260,000, he countered and they paid $268,000. They put down 20 percent to avoid private mortgage insurance and snagged a 30-year fixed rate of 3.75 percent from a credit union. Their monthly mortgage payment is $1,524.

Before you take the plunge, consider the answers to questions often posed by first-time buyers:

Will I qualify for a mortgage? Lenders will scrutinize your “three C’s” — credit history (your credit score as well as a deeper dive into your record of debt repayment), capacity (income, savings and investments) and collateral (your down payment and the value of the property you want to purchase, as determined by an appraisal). Lenders will verify your employment (job, school or military) for the past two years and try to predict how likely it is that you will keep your job. If you’re weak in one area, strength in the other two areas or in a spouse’s bona fides may compensate. Or you may need to beef up your credit score, establish a more stable income history or save for a bigger down payment.

How much house can I afford? That depends on the monthly mortgage payment for which you qualify. Lenders apply payment-to-income ratios that you can also use for a ballpark estimate. Under the rules set by Fannie Mae and Freddie Mac (agencies that guarantee the loans made by lenders), your monthly mortgage payment shouldn’t exceed 28 percent of your monthly gross income (before taxes and other deductions). That includes principal and interest, real estate taxes, homeowners (hazard) insurance, and homeowners association dues.

Recurring monthly payments for all debts — mortgage, car loans, credit cards and student loans, even if they’re deferred — shouldn’t exceed 36 percent of your monthly gross income. (With student loans, it’s the monthly payments, not the total debt, that count.) The Federal Housing Administration, another loan guarantor, allows ratios for mortgage and all debts of 31 percent and 43 percent, respectively (it doesn’t include student-loan payments that are deferred for a year or more).

Lenders don’t factor in the cost of maintaining a home. To play it safe, budget for one-twelfth of 1 percent of the home’s value for monthly upkeep.

What will my interest rate be? The higher your credit score, the bigger your down payment and the lower the risk of default you pose to the lender, the better the interest rate you’ll get. You’ll secure the best rate — somewhere near the recent 30-year fixed-rate average of 4 percent — if you have a credit score of at least 740 and can put down 40 percent of the purchase price, says Ramez Fahmy, sales manager of Caliber Funding, in Bethesda, Md. Lenders add a quarter point to their best rate if you put 15 percent or 20 percent down, as long as your credit score is at least 740. But let’s say you put down less than 15 percent. With a credit score of 740 or higher, you’ll pay an extra quarter of a percentage point on your rate; with a score of 720 to 740, you’ll pay a half-point more; and with a score of 700 to 720, expect to pay a full point more. If your score is lower than 700, you’ll pay from 1.25 to 3.25 points more.

How much cash do I need upfront? Fannie Mae and Freddie Mac require a minimum 5 percent down payment. If you put down less than 20 percent, you’ll have to pay private mortgage insurance to protect the lender if you default. PMI costs about 0.5 percent to 1.5 percent of your loan amount per year, and the monthly cost factors into the debt-payment-to-income ratio. The FHA sets the bar at 3.5 percent down but requires an upfront mortgage-insurance premium, which is often rolled into the loan amount.

Our neighbors to the South are feeling the same effects…

Negative equity remains a drag on housing market

Nearly 1 in 3 homeowners with a mortgage in L.A. County owes more than the property is worth, new data show. These underwater loans hinder mobility and hurt prices because they tend to stymie the important move-up market.

Alejandro Lazo, Los Angeles Times, May 24, 2012, link


Negative equity is a drag on housing marketMore than 60% of loans are underwater in some high desert locations including Palmdale, above, new data show. (Michael Robinson Chavez, Los Angeles Times / May 31, 2011)

Even as a tentative housing recovery in the Southland appears underway, a big stumbling block remains: the vast number of underwater homeowners.

Nearly 1 in 3 homeowners with a mortgage in Los Angeles County owes more on the loan than the property is worth, according to fresh data from real estate website Zillow. In the hard-hit Inland Empire, that climbs to more than half of borrowers.

In roughly 10% of Southern California cities, 1 of every 5 homeowners with a mortgage owes double the value of the house, according to the data, released Wednesday. As sales and prices improve, some economists expect homeowners who have been stuck in underwater properties to try to sell their homes, muting any significant price appreciation.

“Generally I think we are seeing strong signs of an emerging recovery in the housing market — in 2012 we are going to see strong sales growth,” Zillow Chief Economist Stan Humphries said. But “generally our thesis is that the bottom is going to be a pretty long and rocky affair, and people shouldn’t expect a V-shaped recovery. And we are not going back to the go-go years.”

Underwater homeowners in Los Angeles, Orange, Riverside, San Bernardino, Ventura and San Diego counties were a staggering $138.9 billion deep in negative equity at the end of the first quarter, Zillow reported. Nationally, underwater borrowers owe about $1.2 trillion more than what those properties are worth, Zillow estimates.

The new Zillow data show the severity of the negative equity problem down to the ZIP Code level in Southern California.

The data indicate that cities farthest from major job centers are now the deepest underwater. More than 60% of loans were underwater in places such as Palmdale and Lancaster in the high desert, and San Bernardino and Hemet in the Inland Empire.

Neighborhoods with ZIP Codes holding the highest percentage of negative-equity homes included downtown Los Angeles, parts of Adelanto and Victorville, and the Lake Los Angeles section of the Antelope Valley, according to Zillow. The firm calculated the percentages by matching the estimated value of properties to all outstanding mortgage debt and lines of credit associated with those homes, as supplied by the credit firm TransUnion.

The plunge in home values led many experts to predict that homeowners would walk away from their properties in droves — making a calculated decision that staying in a home worth less than the debt on it made little financial sense. That big wave has not materialized.

Richard Green, director of the USC Lusk Center for Real Estate, has studied the issue and found that borrowers who had put higher down payments on their properties were less likely to abandon their homes even if they couldn’t sell their homes for enough to pay off their mortgages.

“People don’t like to walk away from something they have put money into,” Green said. “People seem to hate realizing losses.”

Instead, negative equity has created a drag on mobility and home-price appreciation as people have gotten stuck in their homes.

Before the crash, people would trade their starter homes after a few years for bigger ones. Moving up was so common that chains of buyers and sellers would develop, with each deal dependent on another. The breaking of that chain has created a significant drag on the market, economists said.

Nevertheless, G.U. Krueger, principal of Housingecon.com, said that a significant number of potential move-up buyers with equity in their homes remains. What would help the market is an increased certainty that the economy is headed in the right direction.

“There does seem to be a lot of positive equity left,” he said. “If consumer confidence returns to the market, it could turn into a little bit of a move-up market, which could be the surprise of the season.”

Back from the brink – a How-To…

Back from foreclosure to homeownership

Americans, trying to escape rising rents, are venturing back into housing despite prior default

Jilian Mincer, MSNBC, May 16, 2012, link

Daniel and Robin Akerman inspect their new house after buying in short sale in Pensacola, Florida

© Carlos Barria / Reuters  /  REUTERS

Daniel and Robin Akerman inspect their new house after buying in short sale in Pensacola, Fla.

When Jennifer Anderson’s family could no longer afford their mortgage and lost their home, she expected many years to pass before they would again become property owners.

But less than two years later, in March, they purchased a $297,000 house outside Phoenix, Arizona, after qualifying for a loan backed by the U.S. government.

They joined a small but growing number of Americans who are making a surprisingly quick return to homeownership after defaulting on their loans or being forced into short sales that cost their banks money.

“We didn’t really expect it,” said Anderson, 40. “We were resigned to the fact that we were going to be in a rental property for a while.”

Financial problems arose after she lost her job as a customer service representative for a health insurance company and her husband’s hours at an automaker were cut. To make matters worse, they used up her retirement savings trying to keep their home.

Data is not available, but interviews with more than 30 lenders, builders, Realtors and consumers suggest that a growing number of Americans are getting back into the housing market, even though they went through a foreclosure, bankruptcy or short sale in recent years.

“Most are not ashamed or bashful about what happened because so many people were forced into that reality in the last six years,” says Graham Epperson, vice president of sales in Arizona for the PulteGroup, a leading U.S. homebuilder.They want to escape rising rents and take advantage of home prices, which are down by about a third from an April 2006 peak.

FHA to the rescue
Much of the comeback wouldn’t be possible without help from the U.S. government, namely the Federal Housing Agency. It was created in the 1930s as part of a broader push by Washington to foster home ownership and fight the Great Depression.

The number of FHA-insured home loans has soared in recent years as subprime loans have disappeared and fewer Americans have qualified for conventional mortgages backed by Fannie Mae and Freddie Mac, which were rescued in 2008 by the U.S. government after loan losses.

Federal Reserve Chairman Ben Bernanke stressed the point last week, saying banks have become so restrictive that many worthy homebuyers are being frozen out of the market, and lending practices are not likely to loosen any time soon.

In contrast, FHA-backed loans are an option for many who defaulted on their mortgages or were forced into a short sale. FHA loans, combined with those backed by the Department of Veteran Affairs or the Department of Agriculture, had a record share of the market in 2011.

“These are not mainstream programs geared for mainstream borrowers,” says Greg McBride, senior financial analyst at Bankrate.com, who expects to see more of those with blemished credit reenter the housing market.

Most of these reentering buyers are using FHA-insured loans, which at the end of 2011 accounted for about 30 percent of loans for home purchases, compared with 4.5 percent in 2005.

A conventional mortgage typically carries a lower interest rate than does an FHA-backed loan, but it also requires a credit score of at least 720, proof of income and a significant down payment. In contrast, FHA loans historically have been available to help low and moderate-income families buy homes.

FHA borrowers typically need a credit score of at least 620 and a 3.5 percent down payment. The FHA charges an upfront mortgage insurance premium of 1.75 of the loan (which can be rolled into the mortgage) and an annual 1.25 percent premium on the outstanding loan.

Bad memories
For some economists, alarm bells are ringing.

Edward Pinto, resident fellow at American Enterprise Institute, a conservative think tank, said the rise of FHA-backed loans flies in the face of the government’s stated mission of getting more private capital into housing finance.

Furthermore, a requirement that borrowers taking FHA-backed loans make a down payment of just 3.5 percent of the purchase price brings back bad memories of how many subprime mortgages turned bad as housing prices began to fall in 2006.

According to the S&P/Case-Shiller 20-city composite index, U.S. home prices were down 3.5 percent in February from a year earlier and are now at their lowest since late 2002, although there have been some signs that prices are beginning to inch up.

“FHA is putting people back into situations that still have high risk of default,” Pinto said.

He noted that a lot of these loans are made to consumers with credit scores well below 720 — the median national score for all households– and that about 15 percent of loans made to people with scores of 620 to 659 are likely to fail.

Second chance
There have been about 4.2 million foreclosures in the United States since 2007, according to data firm RealtyTrac. It expects that number to climb to 6 million by early 2014.

A bankruptcy remains on a consumer’s record for seven years, but that consumer can start raising his or her credit score in several months by decreasing debt, not borrowing more and paying bills on time.

“Most of the loans that are getting done are for people who have really rebuilt their credit,” says Frank Donnelly, president of the Mortgage Bankers Association of Metropolitan Washington, D.C. “They have to prove (to the lender that) it was something like a job loss that caused this and not chronic delinquency.”

As well as a minimum credit score of 620, lenders look at why the person lost the home. They’re much more likely to lend to people who lost a job than to consumers who could have afforded their mortgage but chose to default.

Builders eager to sell homes are not only offering to help once debt-mired clients find loans but providing free credit-counseling programs like the Homebuyer Solutions program offered by Quadrant Homes in Bellevue, Washington.

“A lot of times when people enroll they just don’t know where to start,” says Teage Christensen, manager of the program. His goal: help clients get at least a 600 credit score.

Debra Eaton stumbled on the program when she and her husband were visiting model homes out of curiosity. They had filed for bankruptcy in 2008 after her husband was seriously injured at work and she took time off from her job to care for him.

After the bankruptcy, their credit score plunged to 460. “It’s not that you don’t pay your bills because you want to go on vacation,” she says. “You don’t pay because you don’t have the money.”

By November 2011, their credit score had improved to 680 and Eaton and her husband, a veteran, qualified for a Veterans Administration loan to purchase a $252,000 home near Tacoma, Washington. They moved into the three-bedroom house the day before Thanksgiving.

“If you would have asked me then if I was going to buy another home, I would’ve told you no way,” she says.

The foreclosure tax break debate continues…

New plan floated to stymie foreclosures in San Francisco

Rachel Gordon, SFGate, May 4, 2012, link

Lenders would lose a potentially lucrative exemption from San Francisco’s transfer tax on foreclosed properties, under the newest plan by city officials to help financially struggling homeowners from losing their homes.

John Avalos: Legislation has teeth

Under current law, lenders and financial institutions that take possession of a foreclosed home don’t have to pay the real estate transfer tax. All other purchasers of foreclosed homes, however, must pay the levy.

“We see a real problem in this city and we want to be able to have an adequate response,” said Supervisor John Avalos, chief sponsor of the legislation. “This ordinance is really about trying to make sure we’re inhibiting foreclosures in San Francisco.”

If the exemption for lenders had not been on the books last year, the city would have received an estimated $8 million extra in transfer tax revenue on 831 foreclosed homes. In 2005, when there were 26 foreclosures that would have been affected, the extra revenue would have been just a couple hundred thousand dollars, said City Assesor/Recorder Phil Ting.

He helped craft the new legislation to eliminate the tax exemption, which he said would help level the playing field. Avalos will formally introduce the plan at the Board of Supervisors’ meeting Tuesday. His co-sponsors are Supervisors David Campos, Malia Cohen, Eric Mar and Christina Olague.

San Francisco’s transfer tax rate escalates with the value of the property. For example, the rate is $6.80 per $1,000 for homes that sell for between $250,000 and $1 million. The charge is $7.50 per $1,000 for homes that sell for more than  $1 million but less than $5 million. The tax rate is higher for pricier properties.

On a $700,000 foreclosed home that wasn’t sold at auction, the one-time tax hit on the lender that held onto the property would be $4,760, if the new rules were in place. Would that be enough to get the lender to work out a new loan-repayment arrangement with the homeowner rather than to foreclose? The answer: We’ll have to wait and see.

The Board of Supervisors can propose the change, but voters would have to approve it. The plan is to hold at least one City Hall hearing on the proposal before placing it on the November ballot, the same election in which all of the co-sponsors except Cohen are up for re-election.

The Board of Supervisors already went on record in April calling for a halt to foreclosures in the city.

“This is finally something that actually has some teeth to it,” Avalos said.