I’m posting this because it strikes me as good advice that shows some thinking outside of the box for financial planning, which is what I like to think I do regarding real estate. I have subscribed to Justin’s email newsletter ever since I saw him speak at a California Association of Realtors conference a few years ago. I have never worked with him, I don’t know how good a job he does, but you might want to contact him if you are looking for a Financial Planner. I certainly will.

Justin Krane, a Certified Financial Planner^TM professional, is the founder ofKranefinancialsolutions.com. Known for his simple, savvy, holistic approach to financial planning, he has the unique ability to advise his clients on how to merge their money with their lives, so that they can make sound decisions with their finances, and get more of what they want in their lives.

8 Things I Want You to Know Right Now

1. Try not to panic. It’s tough to make money that way.

2.  Keep your eye on the price of gold. For stocks to make a comeback, gold needs to go lower.

3.  The stock market needs leadership from Washington. Obama needs to appeal to business owners and tell Congress to come back from vacation and get a better budget deal done.

4.  If you had a target allocation of 50% bonds and 50% stocks, you probably are now 45% stocks and 55% bonds. Consider rebalancing back to what your initial allocation was.  This is general advice.  I have no idea what your risk tolerance is and when the PERFECT time is for rebalancing.

5.  Company insiders (CEOs) have been buying their own company stocks aggressively. That is a good thing.  Many retail investors have been selling out of mutual funds – great contrarian indicator – meaning the general public makes poor timing decisions.

6.   Based on your situation, consider converting your IRA to a Roth IRA. Talk to your financial advisor and CPA for all of the details.

7.  Call your mortgage person and consider refinancing your mortgage.

8.  Not sure what you should do based on your own circumstances?  Give us a ring.  310-989-0934 or 800-506-6071 or email us at justin@kranefinancialsolutions.com. We’re here for you.  No judging, just really solid advice to help you figure this financial stuff out.

This newsletter is for informational purposes only and should not be construed as individualized investment advice.

P.S.  Click Here to forward this information to anyone who might be interested.

Starting October 1, 2011, “Conforming” (think Fannie and Freddie) and FHA loan limits are set to be lowered nationwide as the federal government looks to lessen its footprint in the business.  This means the current loan limit of $729,750 in Los Angeles that we’ve gotten used to the past several years will be reduced to $625,000 this fall.

So why does this matter to you? Since most buyers rely on the low rates, smaller down payment requirements and the easier underwriting guidelines offered by these government backed loans, the market is going to lose a tremendous amount of its purchasing power.

When purchasing power decreases it puts downward pressure on sales prices. For sellers in certain price ranges, this means fewer qualified buyers this fall.  For buyers, this will put many properties out of reach.

For example: with the conforming loan limit at the current $729,000 the average buyer with 20% down payment can buy at $910,000 house.  When the conforming loan limit decreases back to $625,000, the average buyer with 20% down payment can afford a $780,000 house.  Today an FHA buyer with the minimum 3.5% down payment has the power to buy a $755,000 property.  After October that max purchase price drops to $646,000. 

Of course there is, and will continue to be financing far above these loan limits.  However, these “non-conforming,” or jumbo, loans may have higher interest rates, are more difficult to qualify for, require a larger down paymnet, and require more post-closing cash reserves by the borrower.  It’s also important to know that these higher loans are not backed by the government, so in turn the jumbo loan product varies significantly from one bank to the next, and one lender to another.  It is not “one size fits all” when it comes to jumbo loans. 

For more information on jumbo loans, or conforming loan limits, you can contact Lyndi Mallory, our Teles Financial mortgage consultant – 323.877.4028, lyndi@lyndiforloans.com.

I’ve been reflecting on appraisals lately, and I’m not alone— almost everyone who sells real estate is having appraisal issues. Why? Because appraisals are based on closed sales, appraisers are evaluating the present value based on the past value. If we’re in a declining market, appraisals will be close to the price that the buyer and seller agree on. It’s when we are in a fairly normal or increasing market that we have the issues that many of us face today. You might see this as good news since it could be an indication that the market is normalizing or increasing. From the appraiser’s view it just looks like available comparables can’t justify increasing sales prices.

There is general acceptance of the notion (believed by many appraisers) that appraisal is a science, not an art (even though you’ll get as many different valuations as you have appraisers on the same property.) Many buyers believe this as well. But consider this scenario:

There is a 2-bedroom, 1.5-bath house in good condition in a nice neighborhood in a small community within Los Angeles. It has a guest house for which no permit can be found, nor can a permit be found for the half bath. So for appraisal purposes, this is a 2-bedroom, 1-bath house. Because very few properties like this sell in any 3-month period, the only sales comparables that fit this size house are distress sales in poor condition that sold in the range of $350,000 to $450,000. Six months ago, there were a few comparables that sold for $480,000 to $520,000. An appraiser brought in a value of $440,000. Why? Because the “good” comps were too old and the more recent comps were all low, so to his mind that meant that the current value was lower.

Here are some questions for you:
Had this appraiser seen all the properties that he used for his research? No, because in the current appraisal business these appraisers are working all over Southern California. The likelihood that they have ever been inside the comparables they use is slim.

Did he talk to the Realtors who actually did see the properties? Very few appraisers bother to do that.
Did he listen to the listing agent who met him at the property with comparables? No, because he thinks that appraisers know more than Realtors who are just trying to make a sale. He pretty much said that.

Why all of a sudden did we have such low comparables? Did the values drop? Again, very few properties of a given size sell in this zip code. By chance, the only three of that size and configuration that sold in the previous 90 days were short sales and foreclosures. The consequence is that regular sellers who own 2-bedroom 1-bath houses are reluctant to sell because the only comparables that appraisers are willing to use are so low. It’s a vicious cycle. One almost feels that that is what some of these appraisers and lenders want to see happen, because it is less risky for prices to be low.

When prices drop, regular sellers either don’t need or want to sell or can’t because they now owe more than the property is worth. They can’t refinance into a lower interest rate for the same reason. In 2005-2007, if you lost your job you might be able to use your equity line of credit to get by for a month or two. Or you could sell for a profit, move to a less expensive home and rent for awhile until you got on your feet. Today more people are stuck with too much debt and nowhere to turn. For many of these people, it is the same debt they were totally fine with in 2006, but their circumstances have changed. Now their only option is either foreclosure or short sale. And there you have more lower prices.

But let’s go back to the pure appraisal question. How do you evaluate a property? Wikipedia says: Real estate appraisal, property valuation or land valuation is the practice of developing an opinion of the value of real property, usually its Market Value The need for appraisals arises from the heterogeneous nature of property as an investment class: no two properties are identical, and all properties differ from each other in their location – which is one of the most important determinants of their value.

In residential real estate, market value is usually defined as the price that a willing buyer and a willing seller agree upon subject to appraisal if a loan is necessary. If everyone paid cash for property, the situation in real estate today would be much different. We wouldn’t have had the bubble and the resulting crash, for one thing, since they were both caused by unsafe and unsound lending practices.

Market value is a concept distinct from market price, which is “the price at which one can transact”, while market value is “the true underlying value” according to theoretical standards. The concept is most commonly invoked in inefficient markets or disequilibrium situations where prevailing market prices are not reflective of true underlying market value.
This is the crux of the matter: the prevailing market prices are not reflective of true underlying market value.
In San Marino, prices have not dropped. Why? Because most homes there are owned outright. The same is true in parts of Arcadia. Distress sales drive prices down. If no one is in distress, the price doesn’t go down. Why not, when the entire country has been in a housing depression? Because if you aren’t in distress and you can’t get the price you want, you just don’t sell.

What I am seeing with all the HVCC (Home Valuation Code of Conduct) and other strange rules pretending to establish reasonable rules for evaluating properties is that appraisers are all looking at market prices and defining them as value. If a buyer believes that a house is worth, say, $500,000, because it has all the amenities he feels he should find in a house at that price, why should an appraiser be able to declare that the actual value is only $350,000 because that is what a house of similar size sold for down the street?

So what does a good appraiser do?
What does a good Realtor do?
What is the relationship like between a good appraiser and a good Realtor?

How much income does a borrower need to qualify for a home mortgage loan?

A borrower’s monthly debt must be approximately 45% of their monthly income.

To qualify for a mortgage, a borrower must pass two debt tests:

1. Housing Debt – The housing cost must equal approximately 40% of the borrower’s monthly income.

a. The housing cost = Mortgage, Taxes, and Insurance

b. If the housing cost $4,000, income should be approximately $10,000.

c. $4,000 is 40% of $10,000.

2. Total Debt – The housing cost is added to all consumer/credit card debt. The total debt must be approximately 45% of the borrower’s monthly income.

a. If the total debt is $4,500, income should be approximately $10,000.

b. $4,500 is 45% of $10,000.

3. To calculate the borrower’s debt ratio, divide the debt by the income.

a. If the monthly housing cost is $3,200 and the monthly income is $6,500, divide $3,200 by $6,500.  This            would yield a housing debt of 49%.

b. In this instance, the housing cost is too high to qualify.

Information provided by Paul Cawthorne,

From Linda Wilkes, Ambassador Capital Mortgage:

FHA Annual Mortgage Insurance Premium to Increase

If your clients are still on the fence about buying a home, you should let them know that the Federal Housing Administration (FHA) is increasing mortgage insurance premiums on FHA home loans as of April 18, 2011. This deadline applies to the FHA case assignment date.

This increase could cost your buyers more money each month for their total monthly mortgage payment. What can your buyers do? If they are close to contract, advise them to buy now before the new mortgage insurance premium takes effect. They must have an active loan application for the subject property prior to April 18, 2011.

HUD Temporary Flipping Waiver Extended

In an effort to expand access to FHA mortgages and allow for the rapid resale of foreclosed properties, HUD announced a temporary waiver of the 90-day flipping restriction until December 31, 2011.

The waiver is subject to certain conditions, and eligible mortgages must meet these conditions to take advantage of the waiver. The complete text of the waiver extension, including conditions the waiver is limited to, is available on the HUD website.

Call or email Linda if you want more information on FHA loans.

Here is an inside description of one family’s experience with navigating the loan modification process. These are clients of mine who sold their first home that their growing family had outgrown and bought a larger one right at the peak of the market and then had the misfortune of losing a job and half their income. I’ve always admired these people for their positive attitude about whatever came their way and their ability to keep moving forward. They sent me this story of their experiences because they want to help others navigate these very choppy and treacherous waters if they can. Please feel free to comment or ask questions and I will get them to my client for whatever answers might be available.

Our story is a familiar one.
In January 2010, my husband lost his job. We could no longer afford our mortgage
payments, so we stopped making them. That sounds much easier than it actually was
(emotionally, anyway). We’d purchased our house at the height of the market so we
owed about $120k more than what we could sell it for. A regular sale wasn’t an option
for us. We began researching our other options and after talking to friends in similar
situations, reading articles and discussion boards online, we came to the conclusion
that despite Obama’s Making Home Affordable program (HAMP) and despite all the
efforts of millions of homeowners trying to save their homes, very few people actually
succeeded. Our particular loan structure made a work-out even more difficult. We began
trying to make ourselves comfortable with the idea that we would be losing our home.
Thanks to a persistent friend who couldn’t accept that we were going to let it go so easily,
we rallied. This month, we were offered a trial modification from our bank, which gets
us 90% of the way to getting a permanent modification. Here’s what we did right.

We bought our second mortgage.
We bought our home 4 years ago with two loans: the 1st mortgage was 80% of the
purchase price and the 2nd was 20%. Indymac held our 1st and CitiMortgage held the
2nd. This definitely made our journey more complicated. Thanks to a conversation with
a financial counselor, I discovered that it was possible to negotiate with the bank to buy
our second loan (a settlement). It’s basically like doing a short sale, except we could be
our own buyers. I did a little research on it, and despite not really having much in
savings, we thought we’d give it a try. I called the bank and asked to talk to someone
about a settlement. They transferred me to the loss mitigation department, who had me
fill out some paperwork and submit a hardship letter, which I wrote. In it, I outlined that
we had a hardship (income loss) that we’d like to make good on our loan in any way that
we could. I explained that because we bought at the height of the market, if our house
sold today in a short sale or foreclosure, after paying off our 1st mortgage, there would be
nothing left for the 2nd. I offered to settle with them by paying $9,000 for my $119,000
loan. It seemed impossible, but worth a shot. A few weeks later, they called and
countered. They offered $12,000 and I took it! I wired in the $12,000 and within a
couple of weeks the loan was written off as ‘settled for less than the amount owed.’ We
took a hit on our credit, but it meant that if we did lose our home, they couldn’t come
after us for the money later and if we didn’t lose our home, it was again worth
approximately market value.

We called a HUD Counselor and our Congressman.
After buying our 2nd mortgage, we started trying to modify our 1st. This was not
easy. This application was about 67 pages. It required constant updating (sending in
a new paystub every two weeks, a new bank statement every month and writing letters
explaining things when the packet was kicked back because the reviewer was confused).
I called 2x a week to check on the status of the modification and to see if they needed
any new documents. After 4 months, I had to resubmit my application (again, 67 pages)
because it had expired. And after 5 months, we got a notice on our door that our house was being sold at auction. It seemed like the end. But we had two things on our side.

First, our HUD counselor knew the California laws: that they couldn’t sell our home at
auction while we were in the HAMP modification process. She called our bank on our
behalf and made sure that we had a process for stopping the sale (that process was, of
course, complicated). Second, I’d contacted our congressman early in the modification
process, asking for his help. His office had a contact within the bank, who they regularly
called to check on the status of our loan. That’s all they could really do, but just the
fact that the congressman was working on our behalf helped us get special attention. I
called his office as soon as we got the foreclosure notice on our door. Within days, the
bank called us (this NEVER happens) to tell us that our sale was put on hold, that the
escalations department was handling our modification and that they were trying to finish
it.

Three weeks later, we had an offer for a trial modification. From what I understand, this
means that the bank has established that we are eligible for a permanent modification and
that they can offer us a new loan. They are offering us a new payment, which is about
30% less than our old payments combined, and if we make those payments on time for 3
months, they should offer us a permanent modification. There are still things that could
go wrong. Trial payments have been known to go on much longer than 3 months. Banks
are overwhelmed and under-staffed, so they make mistakes. But this is a win, and for
now, we’ll take it.

Find yourself in a similar situation?
• Call a HUD counselor. Operation HOPE was very helpful to us: http://
www.operationhope.org/smdev/
• Contact your congressman and ask if he/she can assist you when dealing with
your bank. On Congressman Becerra’s website, he has a button right on his home
page that says “How can I help you?”: http://becerra.house.gov/
• Be persistent. It is a lot of hard work. But if you’re willing to fight, you might
just save your home.

Check out this letter from the National Association of Realtors Chief Economist, Lawrence Yun:

Home Ownership Letter from Lawrence Yun.

Yun sent the letter to the editor of The Washington Post in response to the January 1, 2011 article, “Trim the Excessive Tax Subsidy for Real Estate.”

My thoughts? Tax incentives have influenced the ability for people to own homes for decades. The first-time buyer tax credit of the last couple of years was critical in propelling the market through a very dark time. Many people are nudged into home ownership on the advice of their tax adviser when their income improves to the point of being able to benefit from the mortgage interest tax deduction.