What is this “buyback” stuff I hear about the mortgage industry?

Read this article: “http://www.latimes.com/business/la-fi-harney-20100718,0,1118453.story?track=rss.

I have a personal story about this: I have been working to refinance my own home over the last few months (yes, months. It’s excruciating).  The appraisal that was done in May came in at $688,000, which was fine for my purposes. Then it turns out that the lender did a review ”desk-top” appraisal, which means they looked on the computer for all the sales numbers in Eagle Rock, kind of like Zillow does. So the lender hires a licensed appraiser who thinks my house is worth $688,000, and then they arbitrarily throw that number out. Guess what the value they decided to go with–$475,000!!! Without going into boring details, let’s just say that is a ridiculous number for my incredible house.

Those of us who have been involved in such loan and appraisal nightmares question whether these lenders are interested in actually doing any business. They appear to have taken our bailout money and stuffed it in their vaults. Well, they have done that partly to show the reserves that they have to have to prove that they are solvent. There is Catch-22 all over the place here. By that, I mean that as the value of the properties has dropped, the value of the collateral they can claim if the mortgage defaults has dropped, and you have this vicious circle of declining values.

So what is the solution? Some people are just paying cash for properties. That’s great for those who can afford it.  Also, some mortgage and real estate professionals are doing a good job of documenting the values and working with appraisers who know the area they are appraising and can give realistic opinions of value. The bottom line is that if you want to buy a house, work with the best people you can find, be patient, and do everything on your end to ensure as smooth a transaction as possible.

Here is a great article every home buyer should read: http://m.cnbc.com/us_news/37826133. These three moves have always had a bad effect on your smooth close of escrow, but with the “buyback” problem that this article alludes to, it has become a really critical issue. Briefly, if you are in the process of getting a mortgage to buy a property, don’t do these three things:

1. Get a new credit card or auto loan
2. Increase your credit card balances at all
3. Change jobs

Have you had a smooth transaction in the last couple of months? Do you have any tips you’d like to share?

Dear Tracy,
What does this Supplemental Property Tax notice mean to me? Won’t I pay the property tax I owe when escrow closes and then when the next regular tax bill comes?
Dear Buyer,
Supplemental Property Tax is just about the most confusing aspect of purchasing a home in Los Angeles County, and probably anywhere else, but this is the area that I know.
In the first place, property tax itself is confusing because you pay the tax in December for the first half of the fiscal year that began the previous July 1, and you pay the following April for the second half which runs to the next June 30.
But the valuation of your property that you are paying tax on in any given fiscal year is figured as of the previous January 1. If you think this is a bit confusing, add the supplemental tax payment in and you have a real lack of understanding going on.
The key to figuring all this out is threefold:
1. The Supplemental tax bill is based on the reassessed value of the property you just purchased.
2. The county tax assessment is paid in arrears. When you purchase a home, the property tax amount is reassessed, but not instantly. A Q and A flyer from Equity Title (https://www.equitytitle.com/metroportal/EquityTitle/pdf/Generic-S11-17_Supplemental%20Property%20Taxes%202009-equity.pdf) says that you might be reassessed and billed in as little as 3 weeks, or it could take 6 months. Remember, this is a one-time tax bill that “supplements” the regular tax bill. It is not going to be added in to the regular bill so if you buy a home between August 1 and March 1, you are probably going to have a large supplemental bill show up in your mail box. The Supplemental Tax is figured on the additional tax due until the next June 30, the end of the fiscal year. Because the tax you paid at the close of escrow was based on the value of the property as of the previous January 1, remember?

3. The county tax assessor’s office is run by human beings, not computers. This means that when you receive the bill is dependent on things like each county’s own procedures, even on the workloads of the various County Assessor, Auditor, and Tax Collector’s offices. Since we are currently in an economic downturn, you can bet these offices are understaffed. That means that the memory of your escrow closing will have become very distant and vague when this mysterious Supplemental Tax Bill shows up. I once bought and sold a home before the Supplemental Tax bill came. Imagine how painful that was when I figured out that I still actually owed that amount!

This is from the LA County Assessor’s Office:

Supplemental taxes are in addition to the regular annual tax bills. Like annual tax bills, payment may be made in two installments. Supplemental bills are mailed by the Treasurer and Tax Collector’s Office directly to the property owner and in general are not paid out of impound accounts. The property owner is responsible for the supplemental bill(s) and, in the event of an impound account, should verify with the lender regarding who should make the actual payment.
If a Homeowners’ Exemption or Veterans’ Exemption is applied to the supplemental, the actual taxes due may be less than the estimate provided.
If the supplemental tax estimate is a refund, the Auditor-Controller’s Office will generate a supplemental tax refund. Like the supplemental tax bill, the supplemental refund will be mailed directly to the new property owner.
To view a sample Supplemental Tax Bill or for additional information regarding Supplemental Tax Bills, please visit the Los Angeles County Property Tax Portal.
If you have additional questions about supplemental taxes, please email the Assessor’s Office at helpdesk@assessor.lacounty.gov

Here is what you must remember when you receive this bill:
1. You are not being billed for something that you don’t really owe (remember, your tax bills are based on past information).
2. If you impound your tax payments with your mortgage, your lender is not going to automatically pay this bill (they don’t receive this bill, only you do. They will receive regular tax bills).
3. If you do impound your tax payments with your mortgage, your payments should include the amount that the supplemental bills you, so you just have to send your lender the bill and they will pay it out of your escrowed account.
4. If you don’t pay your taxes monthly along with your mortgage, you are going to have more than one tax bill to pay. This is a really good reason to have your tax payments included in your monthly mortgage payment.

I want to emphasize that last point: many experts tell you to pay your taxes yourself because you are essentially giving the lender your money at no interest. I have found in the many years that I have owned property that receiving a hefty tax bill that is due in part right before Christmas and the rest is due right before income tax time is not the best way for me to deal with financial obligations. It’s painful, in fact. The interest I might make on the money that I would put in a savings account (would I really?) instead of sending it to the lender is infinitesimal. I prefer the same regular payment every month. When the supplemental tax bill comes, I send it to my lender and go on with my life. But it is your choice.

Here is my question for appraisers: If last week the highest sale in, say, the 90041 zip code was $695,000 and this week the highest sale is $748,000—does that mean that the value of my house just went up $40,000? And what does that mean about the house just across the line in the 90042 zip code that just closed escrow at $801,000? How does that sale affect the value of my house? Is my house now worth $801,000?

Let’s see what Zillow says: Oh, how completely wrong! It says that the value of my home has gone down by 3% in the last month! How does it figure that? Because it’s a computer model that takes numbers and mashes them up to spit out statistical probabilities, that’s how.
That is also what a “desktop” appraisal does. This is what a lot of lenders use to establish the basis for the value they give a particular property. All it does is take all the numbers within the range that includes your square footage, bedrooms, baths, general location, and mash them together into an estimate of value. Does that have anything to do with what a willing buyer and a willing seller might agree upon to consummate a deal? Not really!
Recently, a buyer had an opportunity to buy a house at what the seller wanted for it before it went on the market. The seller wanted $500,000. This was close to what it had been worth at around the peak of the market say 3 years ago. The buyer consulted 3 appraisers who all said no way was it worth any more than $450,000. And get this, the appraisers figured this out without ever even seeing the property! They looked online, looked at some photos, and made their determination.
Fine, so the sellers went on the market, had literally hundreds of people through the house in about ten days time, had multiple offers and sold the house for $500,000—with no appraisal contingency!
So what is the value? When it actually closes escrow, the value will be the $500,000, right? And if the sellers had accepted the $450,000, it would have been worth $450,000, right? So answer me a couple more questions:
If this Seller had been desperate or badly advised, he might have taken the $450,000 and that would have confirmed the value of that house in the neighborhood. This affects more than just that house, doesn’t it. The house next door is now compared to the $450,000 price, not $500,000. This is what has driven down the market prices in our neighborhoods.
I am on a mission to raise the market value in our neighborhoods to a more reasonable level. I know buyers think values should stay right where they are or even go down—but only until they buy, and then they want the values to go up, too. Just like all the other homeowners around here. Like you and me. I’d love to hear your comments.

I have often said that to be good Realtors, we should buy or sell property ourselves every now and then so we truly understand what our clients go through. Well, I now see that we should definitely undergo the loan process in some manner right now, because no matter how excruciating we find the process to be when we represent our clients, it is about 100 times more excruciating when we have to go through it ourselves.
I started about a month ago to accomplish a refinance on my own home to see if I could lower my interest rate and consolidate a fairly crummy equity line and a perfectly nice first mortgage into a bearable 30-year fixed loan. The equity line people were offering to reduce the balance by 10%, up to $10,000, if I could pull this off by April 30, 2010. Oh, wait a minute, that’s past!  
Of course I would have refinanced a long time ago if my house could have appraised for enough to do it. Here’s the little Catch-22 about the lending world: they like for you to owe less on your home than it is worth by at least 20% before they give you a new loan. No matter that your interest rate is high, your payment is high and it is due to adjust higher in about 6 months, making it even more unaffordable. Even if you want to refinance with the same company to lower your payment so you can still make the payment, they don’t want to lower your payment until they see that you are good for the dough. I can understand part of this thinking. And I am not trying to do a loan modification or a short sale! But they are very reluctant to change the terms of my loan because they want to make sure I’m a good risk!
So here we are today, April, 2010, and the big hurdle about the value of my home is resolved. The appraisal came in high enough to justify the value of my home in relation to the amount I owe. No matter that I have never missed a payment nor even been late on a payment, but it’s still good news.
But now that the appraisal is ok, the underwriter is still not so sure I/we are okay. Mind you, we have FICO scores in the high 700s and have had throughout the years including even the last 2 years when my income dropped and business was not what it was, though not so terrible compared to many others. We have supplied our 2007 and 2008 tax returns, verifications of our bank accounts and investment accounts, proof of our income for 2009 and so far in 2010. Bank statements. Credit reports. Investment statements. Now we are down to the brass tacks. Last week they asked for a copy of the extension we filed for the 2009 taxes. This week they want a Profit & Loss statement for 2009. Why didn’t they ask for this last week?                     
Omigosh, I am in the business and I am getting really upset about all this. I can only imagine what my clients are going through. ( Except for the seller who keeps telling me that his lender got his loan on his purchase in the Valley completely approved and loan docs ordered in 6 days! My goodness, I must be tied up with a bunch of incompetents)!
I think one of the big issues is the self-employed person. If you are on a salary, it’s not difficult to verify what your income is and how long you have made it. We entrepreneurial folks are the ones who have 1099s from one or more places, “business expenses” noted on our tax returns, many items to “question.” That’s why “stated income” loans were so popular when they were possible, because they just looked at your credit score and your bank account and decided if you were good to go. They did cost a slightly higher interest rate, however, so I never have personally gone with a stated income loan. I’ve always gone full documentation—so I am comparing apples to apples about this process. And let me say very clearly, getting a loan in 2000, 2003, and in 2007 was a lot easier than getting one in 2010!
My mortgage broker tells me this: “I understand your frustrations. Believe me I try to be as thorough as possible with all of our clients, but just when you think you have everything they come back with something else. Requirements change so much due to the all the buy backs that Fannie and Freddie are putting on all of us lenders to be responsible for, and no one wants to get stuck with buying a loan back. As crazy as this sounds, I just received a call from FHA Santa Ana a few days ago on a transaction that we closed and funded in October that they are requesting a copy of the business license for the client who was self employed. This is almost 8 months later. Crazy, and there are many stories like this, unfortunately.”
So there you are. If you work for wages and have a fairly simple financial picture, it’s one thing. If you are anything else, you are going on the financial disclosure roller coaster ride if you want to buy or refinance a house with a lender today. This is why cash is king.    

This table is from the California Association of Realtors and is the best explanation I’ve seen of the two income tax credits that are now available to homebuyers in our grand state of California. A couple of notes: although the deadline  to enter escrow to purchase a home to qualify for the state tax credit is December 31, 2010, state officials expect the money allocated for this credit to be gone by this June. Last year’s similar tax credit was gone by June, 2009.
Note for those of you who made too much money to qualify for the Federal tax credit: there is no income limit for California’s credit! Nor is there a maximum price to be paid for the home!
http___www.cartable

 My current listings:

5320 Rock View Terrace, Eagle Rock

5320 Rock View Terrace, $699,000. 3 bedrooms, 1.5 baths, guest quarters, wonderful landscaped yard, great location near Hill Drive in Eagle Rock.         

1132 Wotkyns, Pasadena

1132 Wotkyns Drive, Pasadena, $1,095,000. Stunning Mediterranean adjacent to Arroyo and Prospect Park. 4 bedrooms, 3 bathrooms, family room, 3 fireplaces, street to street lot. Open Sunday, April 12, 2-5 pm.

Making Home Affordable – Web Tools for Troubled Homeowners
It seems like every other person I meet is applying for a loan modification on their mortgage. The general feeling seems to be, “Why not? It might work.” Well, check out http://www.makinghomeaffordable.gov/pr_01192010.html. In this article, the government says there are 3-4 million homeowners who may be eligible for the Home Affordable Modification Program. That’s millions. And all of 110,000 (that’s thousands) have been approved, and of that, 66,000 have been signed. That’s for permanent modifications. They also say that 850,000 modifications in excess of $500 (that’s hundreds) has been approved. If you live in LA County and you are offered a temporary $500 modification, what will that do for you? Not a whole lot, is my guess.

Because the document submission process can be a challenge for many borrowers, the Administration has created
new resources on www.MakingHomeAffordable.gov to simplify and streamline this step.
New resources include:
• Links to all of the required documents and an income verification checklist to help borrowers request a
modification in four easy steps;
• Comprehensive information about how the trial phase works, what borrower responsibilities are to convert
to a permanent modification, and a new instructional video which provides step by step instruction for
borrowers;
• A toolkit for partner organizations to directly assist their constituents;
• New web banners and tools for outreach partners to drive more borrowers to the site and Homeowner’s
HOPETM Hotline (888-995-HOPE).
• Homeowners do not have to pay for loan modification services

If you are considering doing a short sale, where you sell your house for less than you owe on it, you pretty much have to attempt a loan modification first. You can go on the website above in the privacy of your own living room and see where it takes you. Once that’s done and you still feel a short sale is in your future, there are a number of online resources that you should read through (I can help you find them), plus you should consult your tax preparer, accountant, and attorney. After all that, call me back and we’ll talk about selling your home.

Check out this blogpost by Sean O’Toole, CEO of Foreclosure Radar.

http://www.foreclosuretruth.com/blog/sean/time-for-troop-surge-on-the-front-lines-of-the-housing-crisis/ 

If you look at his website and his past blogposts, you see a thoughtful, intelligent person who has studied and understood more of this real estate market than most. I know that I have done what he suggests, talked to people who are in trouble with their mortgages, and I’ve tried to help them find solutions. Unfortunately, if they are in real trouble with no equity, I can’t help them effectively because they have to negotiate with their lender–and that, as Sean eloquently points out, is where the trouble lies.

More thoughts on my chosen profession:

As I reflect on my year in real estate, 2009 has certainly been a challenge. But last year at this time, it was even more frightening. Would I ever sell another house? My notes from December, 2008, show that was a real concern to me. To relate back to what Sean wrote, I did feel like the best thing I could do was to be as helpful as I could. I wrote about the government programs in my blog, I took flyers around the neighborhood, I met with people to discuss their options even though they couldn’t sell. But I felt powerless in most cases to effect positive help.

In hindsight, it looks like the real estate market in our area bottomed out in the first quarter of this year, so I was truly facing a very dark time ahead. But as I looked around at other people going through that dark time, I could see that I had a huge advantage—I am my own boss and no one can lay me off but myself.

Imagine how vulnerable employees feel, not knowing if they will have a job next week. Even public employees are feeling the pinch with unpaid furlough days, frozen wages, pay cuts. It may not be easy to go out and sell another house, but at least I have that possibility in my day.

I have a full-time assistant and I have a family and a household to support. This has been both a burden and an inspiration to me through these difficult times. As my income was drastically reduced, I had to make a number of budget adjustments, but I always felt it was very important to make sure I kept my employee. Imagine how tough it is on a person who relies on an individual person for their livelihood. I have seen many Realtors decide that they can’t afford their staff anymore. Is that a really wise economy? There is the saying, “If you don’t have an assistant, you are an assistant.” If you spend your time doing administrative jobs, when are you going to go out there and do your real job, which it to make deals? The temptation is really strong to spend a lot of time on administration since it feels like work. But it’s not our work. Not if we are really doing what we need to do.

When the market is so difficult, it’s really easy to decide any effort you make is useless and you might as well not try. But with an assistant to keep busy and a family to support, I went ahead and got out there and looked for deals. The key to success is to be there the moment the decision to buy or sell real estate happens. If you are back at the office filing your paperwork, how will you be there with the buyer or seller?

What if we were out in our neighborhoods helping people get to the truth about what they really could and couldn’t do with their homes and providing them with achievable options?

South Pasadena has proven to be similar to Eagle Rock, having about doubled in value over our 9-year time span.

91030 South Pasadena 9 Year Graph

South Pasadena 9 Year Table

 

As you can see, the prices are higher in South Pasadena, but the curve has been similar to Eagle Rock.
In the last 2 years:

91030 South Pasadena 2 Year Graph

South Pasadena 2 Year Table 2007-2009

 

We see that prices didn’t fall quite as dramatically, but losing a quarter of a home’s value is no small number. It looks like prices have stabilized somewhat in South Pasadena, but we’re not seeing any healthy price increases at this time. Remember, in Eagle Rock we are seeing an actual trending up right now, but South Pasadena didn’t really have the big drop earlier that Eagle Rock did.

Why is that? Perhaps because South Pasadena isn’t as much of a first-time buyer market as Eagle Rock is?
Now let’s look at a zip code that is really not an entry-level marketplace, 91108, which includes San Marino:

San Marino 9 Year Graph

San Marino 9 Year Table

The general trend from 2000-2006 is generally up exactly like every other zip code around here, but over the 9 years, this zip code appreciated 82%, around 20% less than South Pasadena and Eagle Rock. But now, look at the spike in the asking price versus the sold price. I guess we’re thinking we’re the Beverly Hills of the San Gabriel Valley, aren’t we? But look at the table for the average sold prices in the last 2 years here:

San Marino Real Estate 2 Year Table

You can ask whatever you want for your property, but the fact is that people are going to pay what they (and the bank, if there’s a loan) think it’s worth. Look at March, 2009—one property sold! In January, only 3 sold. These are really small numbers to try to make any sense out of. This tells me that very few of these homeowners were either willing to sell in the worst part of the market, or that they absolutely had to. Voila! Upon scrutinizing the details on the March 2009 sale, I find that this was a corporate relocation sale. Most of the time, you won’t know from the public data what crisis might have forced a sale unless everything went over the edge to a short sale or a foreclosure.
Here’s the graph of the last 2 years for San Marino:

San Marino 2 Year Graph

It looks like San Marino was just as hard hit by the downturn as everyone else, as far as sold prices goes. And although the asking prices are going up, the sold prices are not. How long can this go on?

 

FHA raises Buyer Requirements

This just in: according to an article on www.Inman.com , Congress  and HUD (the US Department of Housing and Urban Development) is looking at raising down payment and credit score requirements and lowering seller maximum concession limits for FHA borrowers. This won’t add anything to FHA reserves, but it will significantly limit options for first-time buyers. Check out the full story at http://www.inman.com/news/2009/12/3/fha-will-tighten-in-2010.

According to RentBits, a rental search engine for apartments and rental homes, the average rental rates for Los Angeles have seen a slight increase October over September this year. Collectively, across all bedrooms, the average rental rate has risen from $1994 in September to $2020 in October.
“As demand for rentals begins to increase, and supply remains constant, average rental rates will continue to climb.” says Dan Daugherty, CEO of rentBits. “In Los Angeles, our data shows an increase in rental rates for both Apartments and Single Family Homes.”

In most other cities across the US, rental rates for apartments are seeing a slight decrease for the year. Much of this is due to a decrease in demand. Many renters for apartments are either moving into a single-family-home rental, moving back in with family or sharing rooms with friends. This transitional period has put downward pressure on most apartment rental rates.

Do you believe this? I’m not sure, myself, but then I don’t deal with rentals very much. Check out the listings for yourself at www.RentBits.com. Other online resources for rental listings and information include www.Rent.com, www.Craigslist.com, and www.WestsideRentals.com.

One of the most difficult aspects of selling your property is figuring out where and how you are going to move next. Most people want to buy another house, but it can be a frustrating desire in so many ways, unless you have at least 20% down for the new house and can qualify for mortgages on both your new and your old house together. Sellers today don’t want to accept an offer that includes a contingency that the buyer’s house has to sell and close escrow in order to complete the purchase. The most desirable properties go in multiple offers, often to the highest all-cash offer. Certainly those prime properties don’t sell to a contingent offer. So what to do? Sell, close escrow, and rent until you can purchase a home with no such contingency. I know, no one wants to have to move twice. No one wants to sell with no idea what’s next. If you want to move to a specific neighborhood, finding the right place can be a long term proposition. In this situation, you might be renting for quite some time. But sometimes you need to sell and just rent for awhile, and it might be comforting to see that it’s quite possible.

What have you seen out there in the home rental market? Do you have any insights you’d like to share?

Some buyers have been waiting for the “shadow inventory,” the foreclosed homes the banks are reputedly holding back from the market. They hope and pray that this flood will be unleashed, prices will drop even further, and they will at last find their dream home at, say, year 2000 prices. More buyers have been actively competing in the market, but also praying for the shadow inventory floodgates to burst so they can finally get into a home. Unfortunately, they are all waiting for something that isn’t there. Well, that’s not just my opinion, folks, even the CEO of Foreclosure Radar, Sean O’Toole, believes the shadow inventory is a myth. Check out his blog, www.ForeclosureTruth.com. Here’s an excerpt:
First, let’s be clear about what shadow inventory is. These are homes that the bank has already foreclosed on, but which, for no apparent reason, aren’t listed. The implication is that banks are holding REO properties back from the market to restrict supply and prop up prices. This actually seemed like a distinct possibility a year ago when the banks were clearly holding more inventory than they were listing. But that is no longer the case. In the past year, they have resold far more than they’ve taken back, eliminating any possibility that a shadow remains.
Some observers, who earlier this year warned that this shadow inventory would deluge the market with REO listings, have now redefined shadow inventory to include properties that should be foreclosed on. They continue with misguided warnings of a deluge of REO listings any moment now.
These properties aren’t grinding through the pipeline to foreclosure and into the shadow inventory. They’re not moving at all because we as a society lack the political will to foreclose. Because the national focus is targeted on keeping homeowners in their homes, the drain is bigger than the spigot – REO properties are selling faster than distressed properties are being foreclosed on.

And that is the big issue. All properties are selling faster than people are putting them on the market , because it looks like the pendulum is swinging back towards up, so people who want or need to sell their homes are holding out for better prices. I mean, wouldn’t you if you could? Today in Eagle Rock, 90041 zip code, there are 22 listings active on the MLS. 10 are short sales, 2 are REOS, 2 have been on the market over 1 year. That leaves 8 regular sales. When you consider that good properties are selling in multiple offers of from 3 to 20 at a time, you can see that we are truly in a very hot seller’s market.

So, if you are thinking of selling your house, why shouldn’t you wait?
1. Interest rates are low now.
2. Prices are pretty good now compared to where they were earlier this year. I think we actually hit bottom the first quarter of 2009.
3. Unemployment is still high and rising.
4. Lending guidelines are unpredictable—every time banks seem to adjust to new regulatory systems, more new rules come down the pipeline. Some people who could qualify for a loan last year now can’t because of rule changes.
5. Again, the buyers are here now. Do you really want to chance waiting till next year? They could all lose their jobs and move to San Bernardino for all we know.

In other words, if you have a good reason to move now, waiting a few more months may not make you any more money. Especially if you are going into debt today to stay where you are. Any of the above items can change quickly for the worse and stymie the market once again. As Niels Bohr said, Prediction is very difficult, especially about the future.