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If there is one great thing that may come out of this housing crisis is that banks may develop more innovative mortgage products.  In the past, innovation at banks meant figuring out how to fleece consumers.  Now that banks are failing left and right, maybe they will develop mortgage products that are more focused on keeping borrowers in their homes.

For the most part, foreclosures are caused by job loss, divorce, and medical issues that result in the borrower losing the ability to pay the mortgage.  Over the past several months, mortgage lenders have been working to modify mortgages to more affordable terms for in trouble borrowers. 

I wonder if a bank will come out with a mortgage that doesn’t need “modification”.   Lenders should have built in modification processes and terms for borrowers who are truly in a tough spot temporarily.  For instance, a borrower loses a job and they are able to postpone payments up to six months without penalty once during the life of the loan.  The postponed payments would be added back into the principal.  Maybe the borrower would also need to get permission and show hardship before being able to exercise the option. 

There will always be people who would not be able to make their payments under any circumstances, but having this type of flexibility built into a mortgage would be a much more cost effective way for banks to work with borrowers who are truly in a temporary hardship.

Mortgage No-Man’s Land

The mortgage market has created a sort of no-man’s land in Chicago with non-conforming financing.  A no-man’s land is an area that you don’t want to be.  In Chicago, it is selling a luxury condominium priced between $475k and about $650k.  Recent changes in mortgage guidelines are going to cause condo units in this price range to fall into a death spiral value wise.

Over the past year, mortgage lenders and private mortgage insurance companies have been slowly but surely tightening up underwriting requirements to minimize risk.  In particular, the changes overtly affect loans that are larger than the maximum loan amount that Fannie and Freddie Mac will purchase from banks of $417,000.  

For loans larger than $417,000, private mortgage insurance companies (PMI) will not provide insurance coverage.  The second mortgage market is all but dried up, so it is nearly impossible to get a second mortgage with combined loan-to-values greater than 85% and even those are hard to come by.  In fact, some lenders are just saying no to condominiums altogether.  The bottomline is that if you need a loan larger than $417,000 to buy a condo in Chicago, it is going to be damn near impossible to without a 20% down payment. 

Herein lies the problem.  The buyers…

The typical purchaser of units in no-man’s land tend to be high income young professionals (usually couples).  These are buyers who have very high incomes, but generally have not been working a very long time – attorneys, bankers, doctor’s finishing up residencies, etc.  They may earn household incomes of $200k plus per year and can easily afford the mortgage debt from a cash flow standpoint, but they do not have a lot of liquid savings available to sink into an illiquid asset such as a home when a 20% down payment is required. 

The issue with the Chicago market is obvious.  The borrowers who would normally buy all of these high end condo’s downtown cannot readily get financing because of lack of large down payments.  They are being forced to save up for a long time if they want to stay in that price range or are setting their sights on cheaper units.  The owners of these units in no-man’s land are going to have to drop their prices to make them more attractive to the most borrowers or hope they are one of the lucky ones that appeal to well heeled empty-nester with 20% or greater down payments.

The New York Times has an interesting graphic showing the areas of the country where home owners owe more than their home is worth.  In other words, Joe Homeowner has a $300,000 mortgage on a home that is now just worth $250,000.  This is called being underwater by about $50,000. 

Being underwater is not a good thing.  Ever.   One of the reasons there are so many foreclosures is that many home owners who are in trouble financially are unable to sell their homes at prices that would pay off their current mortgage and they are also unable to refinance because no lender is going to grant a new mortgage on a property that is worth less than the loan amount since it is the home that is securing the loan.

What is interesting is that Illinois has a fairly sizable bubble indicating a decent number of homes underwater.  My guess is that the much of that bubble is driven by the far flung suburbs.  Like many areas in the country, Illinois had unchecked development out in the middle of the sticks as homeowners moved further out into the exburbs due to cheaper prices.  However, as gas prices surpassed $4.00/gallon, living in a bland McMansion in a former cornfield didn’t seem so appealing when you have to drive 30 miles each way to work everyday in a SUV.

Most my clients that live in the city haven’t had any problems getting the needed appraised value on refinances.  Typically, we have been assuming that the home is worth what the borrower paid for it if bought within the last two years.  Generally, this hasn’t been an issue.  So while the Chicago market certainly isn’t booming anymore, it also isn’t totally cratering either.

The Federal Housing Finance Agency released the 2009 conforming loan limits on Friday.  The conforming loan limit is the maximum loan amount that both Fannie Mae and Freddie Mac will purchase from banks.  Loan amounts higher than their guidelines are referred to as non-conforming and typically have higher interest rates and stricter guidelines.  These loans are often referred to as jumbo mortgages.  Each year, the housing market is assessed and a conforming loan limit is determined based on the data. 

The new conforming limit for single unit properties nationally will remain where it has been for the past three years at $417,000.  While I hoped Chicago would be considered a high cost area and see a higher conforming limit, it is some what good news that the conforming limit has not been lowered.  What this means for Chicago home buyers is that in order to get the best financing terms, you generally will want to get a mortgage that is $417,000 or less.

In certain high cost areas, the limit will be a maximum of $625,500.  This is bad news for areas that have been hard hit by the housing market crash such as California.  Earlier this year, the conforming loan limit was temporarily raised to $729,750 in most areas of California making it easier for qualified borrowers to get mortgages at reasonable terms.  Now that the high cost conforming limit has been lowered, it is going to continue to put additional downward pressure on home prices in those areas.  A lower high cost conforming loan limit means there are less people in the market to buy higher priced homes which means home prices have to come down further in those areas.

Great Video!

With the housing market stagnant there are a lot of sellers looking to get their homes sold. For buyers, this means you have the pick of the litter and there are quite a few good deals out there. However, buyers and sellers often forget to look beyond price in their strategies for purchasing and selling their homes. One of the tools that can make buying and selling a better proposition can be the use of seller concessions.

Seller concessions are where the seller gives a credit towards the buyers financing to cover closing costs. Lenders will allow the seller to contribute up to six percent of the purchase price towards the financing costs for loans with a loan to value 90% or less and up to 3% for loan to values greater than 90%.

For Buyers: If you are financing a home, you can use seller concessions to pay some or all of your closing costs. This can make the cost of financing substantially cheaper. For instance, if you are buying a $300,000 home and the seller agrees to a 3% seller concession that equates to $9,000 to go towards your closing costs.

For Sellers: Offering concessions can make your property more attractive in a cluttered market. For example, you may use the concession as part of your marketing plan to attract buyers by agreeing to provide seller concessions to buy down the buyer’s interest rate. A 3% seller concession could reduce the buyer’s interest below market. Instead of that buyer getting a rate of about 6% they could buy the rate down with the seller concession to 5.375% giving them a reason to buy your home instead of a competing property without seller concessions.

Pitfalls to watch for…

While seller concessions can be a great tool for both buyers and sellers, there are some rules that need to be followed.

Seller Concessions must be equal to or LESS than total closing costs. The seller concession CANNOT exceed the total closing costs. For example, if the seller concession is $5,000, then the total closing costs will need to be $5000 or more. The lenders will not allow the buyer to keep any surplus concession as cash. They will either require the concession to be reduced and/or the balance of the seller concession to be taken off the purchase price.

Plan ahead of time for seller concessions. If you decide to use a seller concession, do not attempt to raise the price of the home to cover the seller concession. For instance, the home is originally listed at $300,000 and the buyer wants a $5,000 seller concession. In the past, some agents would just raise the contract price to $305,000 and then offer the seller concession. The problem with this approach is that you run the risk of having appraisal issues as the home may not appraise properly. Second, the buyer is essentially financing the concession as part of the purchase. It is not a true “concession” since the seller will be netting the same out in the transaction. During the boom, a blind eye was turned towards manipulating the sales price, but lenders are becoming much more mindful of such practices.

If you are seller and want to use concessions, you should discuss what you are willing to offer and price the home appropriately BEFORE listing the home.

Seller concessions are win-win for both buyers and sellers if done properly. Remember, negotiating to sell or buy a home is not all about the final price. Sometimes there are other ways to offer value to all parties involved.

I just wrote a big ole fat check to pay my second installment of Cook County property taxes so I thought it would be an opportune time to shed some light on property taxes.  Property taxes are just a fact of life when it comes to owning a home.  As such, lenders consider the annual cost of property taxes when approving you for a mortgage.

Here in Chicago, property taxes tend to run about 1.25-1.5% of the value of the home.  However, they can be as high as two percent in some of the suburban communities.  For example, a $400,000 condo in Chicago will typically have annual property taxes of about $5000.  Property taxes is primarily how schools are funded.

Escrowing

In most cases, homeowners escrow their property taxes.  This means the lender collects 1/12th of the annual tax bill along with your mortgage payment and pays the taxes when they are due.  In Chicago, taxes are due in September and March.  However, the September bill is almost always late which is why it was not due until November 3rd this year.  Twice per year, the lender will disburse the money that has been collected in your escrow account and pay the bill on your behalf.  Lenders prefer that borrowers escrow property taxes because it lowers the risk that you will not pay the bill.  As such, unless you are putting 20% down, the vast majority of lenders will force you to escrow your property taxes.

Prepaid Taxes

When you are escrowing taxes, lenders will collect anywhere from 3 to 8 months of property taxes from you at closing.   This money is used to fund the escrow account to ensure you have enough money available to pay the first tax bill after you move in.   The amount collected depends upon when taxes are due relative to your closing date.  The following shows how many months of taxes are collected as part of closing costs when escrowing taxes for purchases and refinances in Cook County

Closing Month/# of Months Taxes Collected

January / 8

February / 3

March / 4

April / 5

May / 6

June / 7

July / 8

August / 3

September / 4

October / 5

November / 6

December / 7

Waiving Escrows

When you put 20% down on a home purchase or take out a purchase money second mortgage (80/10/10) you will have the option of waiving escrows.  Basically, the lender lets you pay your taxes on your own.  This means the bank will not collect tax payments with each mortgage payment and nothing will be collected at closing to fund an escrow account.

Many borrowers prefer not to escrow because banks do not pay interest on the money held in escrow.  In addition, it is one less thing the big banks can screw up!

Be aware though that choosing to waive escrows is not free in most cases.  Most banks charge a risk premium of about .25%  to waive the escrow account which ultimatley gets reflected in your interest rate (will usually result in final interest rate of .125% higher).   When comparing two mortgage loans, it is good to know if one is requiring escrows and the other is not to ensure it is an apples to apples comparison.