Brad Gill

I have recently been hearing from a lot of real estate agents about their buyer's frustrations with the mortgage industry. It seems that most lenders today are taking forever to respond to new loan applicants, not too mention provide them with any speck of customer service, making it nearly impossible for buyers to make the competitive purchase offers required in our current real estate market. And when it comes time for the lender to come through on their loan pre-approvals, many are falling way short on their empty promises.

I hope to shed some light on some common mortgage pitfalls as well as provide some much needed guidance for anyone interested in starting the loan application process, especially if they are interested in applying for a mortgage in order to purchase a home.

The mortgage markets today are far more confusing then they ever have been for consumers, just four years ago banks were handing out loans to anyone with a heartbeat, but this is just not the case today. The same perfectly qualified buyer may receive loan approval from one particular bank but be turned down by another just because banks have their own overlying lending restrictions specific to their own interests.

These additional overlying credit restrictions can turn what seems to be a simple real estate purchase transaction into a nightmare for the buyers. Before they know it their bank of choice may not only be asking for all of their personal financial history over the past three years bust also for all property inspections on the home they are purchasing, and some even ask for all the recommended work brought up on the reports to be completed before they will fund the buyer's new loan.

This may sound perfectly reasonable at first, but if the buyer is in the last legs of purchasing a short sale (which has probably taken three months to move forward) or worse yet a foreclosure (bank owned home/REO) then chances are that the sellers will not pay for the repairs, meaning the buyers would have to pay (could be thousands to tens of thousands) upfront for repairs to a home they do not own or face losing their chance to purchase the property, or worse yet, losing their earnest money deposit.

Many banks are also too busy to handle the business that they are receiving. On any given day the local branch of a larger retail bank may receive anywhere from 150 to 200 new loan applications. This creates a major problem when the branch employs less than 30 loan officers, not too mention the lack of loan processors and underwriters. Banks are still reeling from the mortgage collapse and just do not want to spend too much on building up their business around loans since they took such a hard fall over the past few years.

Then we have the Federal Government trying to do all they can to re-ignite the struggling economy by offering huge incentives for people to purchase and even refinance their mortgages. The Fed's have now been artificially lowering interest rates on 30 year fixed mortgages, to the lowest in 40 years, for the past six months creating a huge demand for both refinances and purchase loans. But the banks know that the demand will be short lived, since the Fed's can only afford to spend money for a short time-frame, and are reluctant to spend overhead increasing their loan operations thus leaving many loan applicants waiting as long as 100 days for their refinance and purchase loan applications to get approved.

So what can the savvy lon applicant do these days in order to protect themselves from a lender's lack of service, but still hope to get an incredible interest rate?

It seems that the "time problem" many are experiencing is most likely due to working with the wrong banks. Although a particular bank has promised to help clients upfront, many end up wasting weeks of time and then end up telling the loan applicants that they cannot qualify due to recent changes in underwriting guidelines or something along those lines.

In my professional opinion, and the most important thing a loan applicant can do to protect themselves, is to first of all find a true mortgage professional to work with, not just a bank's loan representative which is all you'll find in retail. Rather I would recommend seeking the assistance of a mortgage broker as they tend to posses superior knowledge and a wider selection of mortgage programs.

For instance, I happen to work with over 25 different lenders (including Bank of America, Wells Fargo, Citibank, and much more) and have the ability not only to tell on any day which bank is offering the best rates but, most importantly these days, which bank is providing the most reliable service.

Just as some mortgage brokers have the ability to offer different mortgage programs from a wide range of major banks, loan applicants should also apply at more than one mortgage lender. If the applicants choose to work with larger banks this is especially important to remember.

And if any fears are brought up about credit being negatively impacted when applying through many different banks, this is not true. The credit bureaus allow mortgage applicants to shop at as many lenders as needed in a 90 to 120 day time period with all credit checks counting as a single inquiry against their credit.

Yes, I am a little biased because I am also a mortgage broker, but I also continue hearing about buyer's horror stories while working with larger retail banks. And we have horror stories to tell from some of our own buyers who have chosen to work with some larger retail banks (I won't name names but they are the largest bank in America) instead of working with a local mortgage broker. This doesn't mean that all brokers are superior to retail banking operations (or vice versa) but some in particular are definitely better than others presently.

There are enough challenges in today's real estate market that buyers must face; additional challenges in the mortgage market just complicate things even further.

Summer Selling Season in High Swing

Overview:

The numbers are out and things are continuing to improve in our local real estate markets. All across Santa Clara County, the median home price is rising (up 11% last month to $540,000 in July), supply is falling and demand is still growing. We're by no means showing full recovery as the median home price is still down 17% year over year, far under the 2008 mark, but values have definitely stopped declining. And for the second month in a row the median sales price has risen over the half-a-million dollar mark suggesting that our high-end housing market is beginning to show a pulse.

The median sold price marks the halfway point, meaning half the homes sold for more and half for less. This information is gathered from all publicly recorded sales of single family homes in Santa Clara County closed during the month of July.

A total of 1,531 previously owned single family homes sold in the county last month, 35% more than in July 2008, and the highest total for any July since 2005 when the housing boom was still in full swing.

Digging deeper:

Existing home sales are continuing to increase each month as we progress through summer. The latest theme has been a tale of two markets - the lower-end of the market (currently referred to as the "distressed sales" market; representing sales prices up to $650k) and the upper-end of the market (also known as the "step-up" market; representing sales prices over $650k).

The lower-end of the market has been moving strongly for the past few months and lately can even be described as hampered due to a lack of inventory. Sales in this market are dominated by distressed sales of foreclosed properties, also known as bank owned homes or REO, and short sales, the sale of a home where the sales price is less than the outstanding liens.

As we make our way through summer demand is continuing to increase while inventory levels have continued to decline (see graph below). We are down to 1.3 months of supply and an average of 67 days on the market for properties selling for under $650k.

During the month of July there were 2453 (down 49% from July 2008) properties for sale of which 844 were newly listed properties (down 22% from last year), 934 were put under contract (up 86% over last year), and 740 (up 73% from last year) actually sold and closed escrow by month's end.

Demand in this entry-level market is being controlled by first-time homebuyers and investors. First-time homebuyers are seeing great opportunities in the current housing market with the highest affordability witnessed in recent years as supported by historically low interest rates and a multitude of home financing programs and government tax incentives. But first-time homebuyers are not the only one's gobbling up these fantastic prices, real estate investors are also being attracted to these undervalued homes finding that the real estate market may offer better returns presently than the volatile financial markets.

Due to this growing demand for housing and shrinking inventory we are beginning to see multiple offers and even bidding wars breaking out on many properties in the entry-level market. It is not uncommon for sales prices to be much higher than the original listing prices and for first-time homebuyers to compete against all cash offers from real estate investors on the same property. It seems that one of the most important things that first-time homebuyers can do at the moment to prepare themselves for making an upcoming purchase offer is to get fully approved for purchase financing before they begin their home search.

The opposite is true for the upper-end of the housing market which has been suffering from a lack of jumbo financing programs severely limiting the number of qualified buyers for these properties. But even with the current jumbo financing available (which can require large down payments that can make up to 30% of a home's sales price) we have finally started to notice an increase in sales activity. It seems that sellers who have been waiting for the market to change dramatically are getting realistic with today's market conditions and are beginning to price their homes more competitively.

In July we are down to an average of 49 days on the market and 3.9 months of inventory for this price range. Also, during the month of July there were 2432 (down 29% from July 2008) properties for sale of which 711 were newly listed properties (down 25% from last year), 420 were put under contract (up 7% over last year), and 512 (up 4% from last year) actually sold and closed escrow by month's end.

Other major challenges affecting our markets, in addition to the lack of inventory in the "distressed markets" as well as lack of jumbo financing in the step-up market, would be the newly passed Home Valuation Code of Conduct (HVCC) and most recently the Home Economic Recovery Act (HERA). The HVCC, effective as of May of this year, is wreaking the most havoc on the housing market.

The Home Valuation Code of Conduct is a law governing appraisal guidelines and has created a situation where appraisals are less accurate, not provided in a timely manner and are more expensive for the consumer. New appraisal protocol requires lenders to order appraisals through large third party appraisal management companies, some based on the east coast, who then in turn assign the task to a local appraiser near the subject property. Realtors in our area have witnessed appraisers from outside our market area, as far away as Southern California, performing appraisals for their sales.

Also affecting the financing side of the market through the passage of HERA there have been changes made to the Truth in Lending Act, which took effect last month, requiring lenders to provide certain disclosures about mortgages fees in an attempt to help borrowers make better-informed loan choices. However, some in the industry believe the new regulations could create further delays in the lending process by requiring re-disclosure when fees and annual percentage rates change from initial disclosures sent out at the time of loan application.

The chances of re-disclosure as required under the new law are very probable given the recent volatility in the interest rate market and likelihood of borrowers changing their initial fee schedules. Following the required re-disclosure of initial loan terms, borrowers would not be able to fund on their loans until 7 business days have passed, not too mention the 4 day requirement before appraisals can even be ordered.

Previously, lenders could begin underwriting the loan the same day they received an application and have the ability to charge fees to borrowers such as paying for property appraisers. The new regulations now mandate a three-day review period for the loan documents before the loan process can begin which correlates to a 4 day delay in the appraisal ordering process.

Although these new laws only add to the confusion seen in the current real estate market they are unlikely to hinder the current moment that we have seen over the past few months. Thirty-year fixed-mortgage interest rates averaged 5.22 percent during July 2009, compared with 6.43 percent in July 2008, according to Freddie Mac. Adjustable-mortgage interest rates averaged 4.82 percent in July 2009, compared with 5.24 percent in July 2008.

Since a short sale transaction is never a guaranteed solution for the seller, i.e. the seller's bank is not obligated to accept a short payoff on their outstanding loan, buyers who decide to make offers on short sale properties should be aware of several important considerations:

1. Buyers should consider receiving professional assistance when purchasing a short sale: It's crucial for Buyers of short sales to work with someone who is experienced and knowledgeable in short sale transactions whether that person is a licensed REALTOR®, real estate attorney or other qualified professional. REALTOR®s have tons of resources available that can help guide a buyer through the short sale process, from making the offer to protecting them from traps such as the Notice of Default purchase requirement for California if the seller is in foreclosure and the buyer is an investor.

2. Short sales can offer great savings over competing listings, but only if the buyer is willing to wait: The listing agents understand that to produce an offer on a short sale they will need to drop the sales price 10% to even 15% under-market to make the sale worth while for a buyer to stick around long enough to close escrow. Since most lenders will not even consider a short sale until the seller has become delinquent on their mortgage, and not until the seller has been able to market the property for sale and produce and offer, there is usually no way to expedite a short sale transaction and buyers should be ready to wait 2 and even 3 or more months for the seller's bank(s) to approve their offer. So Buyers who either need to sell their home as a contingency of a purchase offer, or those that must be in a new home within a specific time period may want to reconsider purchasing a property involved in a short sale.

3. Short sales are becoming more efficient and popular among lenders: Over the past year foreclosing lenders are not only recognizing that short sales may be the best way to reduce their losses rather than repossessing a property, they are also becoming more efficient at processing them. With abundant pressure to get these under-performing loans off their books, lenders are focusing on streamlining their short sale and loss mitigation departments to ensure quicker approvals of short sales.

4. Short sales are more attractive to sellers than a foreclosure: Short sales are less damaging to a seller's credit history than a foreclosure and offer the seller the ability to negotiate the repercussions from a short payoff. Short sellers will also be able to qualify for future purchase financing sooner than those who suffer a foreclosure on their record. And, since the foreclosure process is usually longer and costlier to the seller's lender than a short sale, most lenders are open to negotiate with sellers regarding the treatment of how they report the short sale to the credit bureaus and how they handle the seller's debt forgiveness.

5. Banks are willing to make deals but don't expect to get a steal: Although the seller's bank will be interested in getting rid of the property they can still foreclose and repossess the property instead of giving it away for pennies on the dollar. Remember, a bank is a business and they need to cut their losses but only to an extent. If you're interested in making a lower offer on a short sale be sure you check the most recent comparables in the neighborhood and don't expect to get more than a 10% to 15% reduction in market value approved, plus before the lender finally approves the sales price they will verify the property's market value by hiring local appraisers to perform value checks.

6. Due to long approval periods, offering prices on short sales may be re-negotiated: Buyers who may be concerned about other purchase opportunities they may be missing due to the length of time required by short sales should know that their offering price may still be renegotiated lower upon approval. Since the seller's lenders can take months to approve a short sale the local market may also continue to drop which can cause issues when the short sale is finally approved and the buyer's appraisal comes up short. But, with most lenders we have worked with in the past, the lenders are more than willing to renegotiate the sales price to reflect the current market value in order to sell the property and payoff their loan.

7. There is a large potential for rejection: A lender's main goal is to minize their losses as much as possible. If a buyer makes an offer on a short sale listing that is tremendously lower than the fair market value of the home chances are that the lender will reject their offer which could cost the buyer months worth of their time (another reason to work with a REALTOR® whom can advise buyers on probable market values). And even if the lender being shorted accepts the buyer's offer there is always a chance that the seller will not submit to the terms of the short sale approval as it is not uncommon for the shorted lender to demand the seller to carry back a personal note for the amount of the shorted payoff.

8. Most short sale transactions are "As Is," but on occasion shorted lenders may approve credits for repairs: Due to the nature of the transaction, short sellers will usually not have the funds available to make necessary repairs or keep up with the maintenance to the property which can leave the house in dis-repair. Depending on the extent of the work, some lenders will be more than willing to consider crediting the buyer for repairs as they would rather receive a payoff on their loan then worry about repossessing the property and then making the repairs themselves before ultimately placing the property back on the market at a lower price. But, some lenders have company policies that prohibit them from allowing any credits for repair items or such.

9. Have a back up plan: It's most important for buyers to remember that short sales are not guaranteed sales. There are many challenges to buying a short sale and although buyers may make an offer they should continue to look for other properties. Buyers should consider all types of sales transactions (short sales, foreclosures and traditional sales) and make offers acordingly.

10. Making an offer on a short sale is still considered a legitimate sales contract: If your offer on a short sale property is accepted by the seller you should be aware that if you put down a good faith deposit, you may risk losing such a deposit if you choose to walk away from an approved short sale to buy another home.

Short sales are not a new thing, they have been around for a long time but until recently they haven't been very prevalent as distressed sellers have usually been able to sell their homes for more than their outstanding loan balances. But with today's downward real estate market, lenders are having to face the reality of the situation and accept a quicker loss over the possibility of loosing more due to a longer and costlier foreclosure process.

But just because short sales have become more popular, there are still other sales transaction types available on the market including foreclosures/REO's and traditional sales. And buyers shouldn't get caught up in getting the best bargain if it means settling for a home they do not desire. Don't loose sight of the most important factor when looking for a home to purchase - that the buyers should want to live in the home.

For residents of Santa Clara County there is a new Foreclosure Assistance Service available - The Santa Clara County Association of REALTORS®, in partnership with the City of San Jose, has helped to establish a Foreclosure Resource Center for all the residents of Santa Clara County. The 'Center' is a one-stop center for foreclosure information and it's entirely FREE!

San Jose, and its surrounding neighborhoods, has experienced a 140% increase in foreclosures over the past two years, from 5,838 in 2007 to 13,989 in 2008. This is consistent with the nationwide housing downturn caused by what many experts like to label as "the subprime lending crisis" immediately followed by the "liquidity crisis". No matter what caused the housing downturn (irresponsible lending habits of "major" banks, subprime loans, over-anxious home buyers, unscrupulous financial derivatives) we are all faced with a real dilemma that cannot go ignored. It's nice to know that our local REALTORS are volunteering their time to help those in need.

To date, foreclosures have concentrated in specific geographic areas, particularly in East San Jose, Central San Jose, and along the southern stretch of Highway 101. The number of foreclosure filings is expected to remain high for some time, as a large amount of outstanding bad loans remain. In addition, the region is experiencing a rise in unemployment due to the housing-induced economic recession, exposing more households to the danger of defaulting on their mortgage.

In an effort to respond to the rapid increase in foreclosures, the City has convened the Foreclosure Prevention Task Force, comprised of nonprofit and real estate industry partners. The Task Force has adopted an aggressive and comprehensive strategy that includes prevention, intervention, family re-stabilization and neighborhood stabilization activities under the ForeclosureHELP Program.

Foreclosure Help through the City of San Jose provides information and referral services to assist families impacted by foreclosure navigate through the foreclosure process. Services provided include prevention, intervention and family re-stabilization. Local REALTORS are volunteering their time to assist those at-risk homeowners by discussing their foreclosure alternatives.  Volunteer staff will meet with at-risk homeowners (FREE of charge) to determine their circumstances and connect them with the appropriate resources such as HUD-certified foreclosure prevention counselors, non-profit legal services, emergency financial assistance and other housing services.

If you or anyone you know might need assistance, please send them to the Foreclosure Resource Center website (www.ForeclosureHelpSCC.org) so that they can contact a representative and setup an appointment. The website provides information on the necessary forms for at-risk homeowners to fill out and bring with them, a list of potential foreclosure scams to be aware of including a list of ways to avoid them, legislative updates regarding foreclosure, a common questions and answer section, and much more. There is also a section available to report neglected and vacant homes so that the City can ensure that our neighborhoods stay safe.

Well, we're officially well into the spring/summer selling season and things are really heating up in our local markets - but how long can you expect this trend to continue? That's the trillion dollar question!

Looking back at May we had great news for California as existing-home sales are up 80% over last year. Locally we saw the median home price for Santa Clara County increase 9% to $475,000 as sales in the higher end homes have finally started to kick in (click here for current Santa Clara County housing stats). I guess when a qualified buyer realizes they can get a million dollar home for around $800k they feel it's a deal they just can't pass up. But then again, how many higher-end buyers are still out there that have the ability to make 30% down payments, especially when money is hard to come by these days.

To sustain an increase sales volume in the higher-end housing markets, we need to see the jumbo loan market (loan amounts above $729k) open up with some more aggressive financing, i.e. allowing higher loan-to-value ratios and less down payment - then we can expect the higher-end market to really rebound as it has already stopped falling.

On the lower-end of the housing market, home sales are still being dominated by foreclosures and short sales, with bank owned homes making up the majority of sold homes. In fact, there is such a demand for bank owned foreclosures that you can almost always expect a bidding war to break out, especially in the Santa Teresa, Blossom Valley, Cambrian, and South San Jose areas of Santa Clara County.

But is this trend going to continue? And what about that large pool of foreclosures that is ready to flood the markets, how will that affect home prices? Well, from an insider's point of view demand has definitely been stimulated by the first time homebuyer tax incentives and historically low interest rates. First time homebuyers are now comprising approximately 40-45% of the housing market.

According to the National Association of Realtors (NAR), first time homebuyers represented over 455,000 home sales purchased nation wide this past first quarter and these are most likely only the first wave as housing affordability conditions are at record high levels. NAR expects for the trend to continue and even realize a measurable increase in home sales during the second half of the year leading to further price stabilization in most areas (especially in Santa Clara County as we have already been experiences a stabilization).

It may seem that the government's plan to increase home sales is really starting to become noticeable and even NAR's own forecast is calling for a continued increase in home sales nationwide, but whether or not our local housing push can last through the summer has become questionable. Recent economic developments have lead to increases in mortgage interest rates and there are still a large number of buyers sitting on the fence unsure of whether or not it is a good time to buy.

It seems that the rest of the world has started to question the Fed's bail-out plan of issuing an unthinkable amount of new government debt...I guess overseas investors don't like the idea of financing old debts with new debts, and this has lead to a massive sell off of US treasuries further resulting in increased mortgage rates.

And if mortgage interest rates continue their current climb (last week we saw rates reported by Freddie Mac's Mortgage Market Survey at a 7 month high) we could notice a negative impact on home sales. We have already seen a decline in overall loan application volume due to the higher rates, and housing affordability is sure to suffer along with it, but according to NAR higher interest rates are not a major determining factor when it comes to home purchases.

Beyond interest rates, mortgage programs as a whole are harder to qualify for, most requiring larger down payments of at least 10%. And if the lender calls for mortgage insurance there are additional underwriting overlays that can disqualify a majority of loan applicants - such as higher credit scores, lower debt-to-income ratios, and higher reserve requirements.

Overall, the current lending environment is not really conducive of a housing recovery other than the low interest rates that WERE present over the past few months. But, if these programs start to loosen as expected heading into the second half of the year, I believe that we will surely see another noticeable wave of homebuyers flood the market.

So what's with that huge pool of foreclosure properties that the banks are holding onto? (Well, I had to keep the best for last - I wouldn't want you to miss everything we have already covered).

It seems that the word on the street these days is that buyers should wait for the next wave of foreclosures to hit the market before they spin their wheels getting caught in bidding wars on the current inventory of REO's. Well, it may be true that there are bidding wars breaking out over these bank owned foreclosures, but don't expect to see a massive volume of homes hit the market anytime soon. And the best deals may not be those often overpriced bank owned foreclosures, we are seeing the best deals being purchased by those few brave buyers willing to patiently wait for a short sale to close.

Some important points to consider for anyone watching the housing market - even if banks had a large inventory of foreclosed homes they wouldn't unleash them on the market all the same time, it seems that they have learned a thing or two from 2007 and 2008, if they control the inventory they can artificially control the demand for housing. Plus, it just takes banks a lot longer to put these foreclosures back on the market once they are repossessed. Prior to 2007 banks could relist a foreclosure in as little as a month, now it can take as long as 6 months - banks are just so busy with staying on top of new business (refinance and purchase loan applications), corporate consolidations and re-organizations (Bank of America and Countrywide, Wells Fargo and Wachovia, Chase Bank and Washington Mutual), and just keeping on top of all of Fannie Mae and Freddie Mac's mortgage guideline changes - surely marketing foreclosures is important but just how fast can you squeeze a watermelon through a garden hose?

Other factors contributing to the hold up is a longer foreclosure process brought about by state legislatures in an attempt to force banks to try every possible solution of keeping homeowner's in their homes before they can be foreclosed. Additionally, state legislatures have extended mandatory moratoriums stopping active foreclosures and extending the required notice times before banks can repossess these homes. Furthermore, many lenders including Fannie Mae and Freddie Mac have begun a renter's program aimed at keeping the foreclosed homeowner in their property as a renter with the ability to repurchase the home at a later date.

Not to mention that the short sale and loan modification processes has become more efficient. Lead by government policy, Making Home Affordable and Hope Now Alliance, lenders have the resources and the procedures in place to maximize their home retention efforts for those homeowners falling into default and for those homeowners unable to keep their homes, the ability to turn short sales around much faster. The banks have realized that they would rather avoid the high cost of foreclosing on a property than pay for the necessary repairs that many distressed properties require before they are even in a condition that can be marketed for sale, and once repaired then require additional maintenance costs. To read an article written this past January discussing such a pool of foreclosure properties please follow the link - Flood of Foreclosures: It's worse than you think.

Final Thoughts: In my opinion, those buyers who are waiting for the best deal will be those that missed out on the lowest prices available in Silicon Valley real estate over the past decade. Remember, when purchasing a home for a primary residence one should not look at the purchase as an investment, rather one should focus on long-term appreciation, tax shelter incentives, advantages of owning over renting, and overall pride of homeownership.