Dan Hartman

Today's buzzword in buying a reasonably priced home is "foreclosure". Foreclosed homes sell anywhere from 20%-60% lower than non-foreclosed homes, making their pricing much more attractive, but there are hurdles to overcome, especially when it comes to property condition. Even though the home is foreclosed, it still must meet the requirements of new financing. I've been working with foreclosed homes for more than 40% of my buyers lately, so I wanted to review a few of the problems we've encountered, and how to avoid them.

To lend on a property, each type of mortgage will have its own requirements as to what inspections must be performed, and what degree of information must be provided by the appraiser. In general, I have found that many appraisers are leaning more towards an FHA-level inspection for all properties, as underwriters have become more conservative. As a result, what is discussed here will be consistent with FHA requirements.

Plumbing

If you had to review all the MLS listings for the past 12 months for trends in new information, one of the phrases you'll find increased in frequency the most is "copper missing". As wave after wave of homes has been foreclosed, enterprising thieves have made an industry of removing thousands of dollars in copper plumbing from homes, and turning it into fifty or one hundred dollars in scrap. Homes without functional plumbing systems due to vandalism will not qualify for normal financing at present.

Also important in regards to plumbing is the functionality of every present item. That is to say, if a particular fixture is in place, it should work. Most good appraisers will test this by running sinks, flushing toilets, or more. A concern at this time of year is winterization, as many homes are shut down over the winter to lower upkeep costs. Most appraisers will require the home to be operable at time of inspection, with flowing water.

Heating

What's the one thing you couldn't live without in winter in New England? A heating system! Because of this, banks will require homes in cold areas to have a functional heating system that has been checked by an appraiser prior to closing. Typically, an appraiser will adjust the home's thermostat so that it trips, and then verify that the system does turn on. A non-working heating system is a quick way homes can be rejected for financing.

Flooring

The vast majority of the time, an appraiser's eyes won't stay focused on the floor of a home for more than a few seconds, as most homes floors are in perfectly acceptable condition. Whether a floor is hardwood or carpet, tile or linoleum, a considerable proportion of homeowners have maintained their floors well. Every once in a while, though, we do find a problem.

When it comes to flooring, it need not be in perfect condition to pass, but there should be some degree of life left.

For hardwood flooring, it is OK for the finish to be dull, even for some limited scuffing. Missing floorboards or other serious problems can be sighted as deficient condition.

For pergo and other tile-like flooring systems, all tiles should be in place and secure. If any of the sub-floor is exposed, this can be ground to delay financing of the home.

For carpet, the carpet should be in reasonable condition with at least a little remaining spring. Some minor staining is acceptable, but large areas of staining are problematic. In addition, significant odors could present problems in underwriting.

Windows

Contrary to popular belief, replacement windows are not a requirement for closing, however, they will go a long way towards lowering heating expense. In spite of the fact that underwriting cannot require windows be replaced, they will look for certain minimum standards.

All windows should present the appearance of functionality, and should have intact glass. In a house with otherwise OK windows, a single window with a cracked pane is unlikely to provoke additional requests from underwriting, but a single window with a broken pane and a hole almost certainly will. In many cases, temporary measures, such as limited boarding (i.e. one or two windows) can be deemed acceptable. If a house is fully boarded up, usually that will need to be undone before it can be inspected for mortgage purposes.

Walls

In most houses, little attention is paid to the walls, as they differ so little with what we expect of them as walls, that is, they are flat vertical surfaces with minimal interruption. Problems can present themselves when we're looking at a home with deferred maintenance problems, such as we find in many foreclosures.

Wall problems come in two basic varieties: damaged materials; and graffiti. Wall materials can often become damaged by physical impacts; alternately, damage can be caused by intrusion of water into the home, weakening the integrity of the wall. Regardless of the cause of the damage, only the most minor of problems can be ignored; any significant damage will normally cause underwriters to request repairs prior to closing.

Graffiti can often be ignored, especially in small quantities. If the artist had been more "creative", it can become necessary to paint before the home will pass inspection.

Exterior

Contrary to popular belief, most home appraisers are not experts on roofing materials. It is rare that an appraiser will get on a ladder to inspect the condition; more often appraisers will depend on evidence available from visual inspection from the ground, and from interior inspection to identify any water damage, the most common result of a roofing problem.

The same goes for siding materials and paint. The most common area where a home will fail FHA inspection is in regards to peeling paint, as lead concerns preclude closing FHA mortgages on homes that might cause lead poisoning. In general, it is very easy to tell what constitutes peeling paint, as paint will often be coming off of the house in larger and larger sections. If you as a home buyer look at a home and suspect the home might be considered to have peeling paint, it will almost certainly be cited for that deficiency.

There are more potential problems a home could have than I can hope top cover in one article, but reading through this should give you a good idea of certain problems endemic to foreclosed homes. As discussed, many of these problems will prevent a bank from closing conventional or regular FHA financing on those homes. What kind of alternatives does this leave?

203(k) financing

The 203(k) mortgage is a subsection of the FHA program allowing a buyer to finance based not only on the purchase price of the home, but also on the cost of rehabilitation or improvements to the home. By working in conjunction with with a contractor, the bank will have assurance it wouldn't normally that the work will be performed satisfactorily, because both buyer and contractor must sign off to allow funds to be paid. For more information about 203(k) mortgages, please see my other article.

Thanks very much for reading! Please leave comments if you have questions that aren't answered here, or with anything you'd like to add.

Dan Hartman is a Senior Mortgage Advisor with Province Mortgage Associates, and an Adjuunct Professor with Roger Williams University and the University of New Haven. He can be reached by cell phone at (401) 263-8655. Photos courtesy of Jim Dusty of Gordon Appraisal, used by permission.

In spite of an unprecedented move by the Federal Reserve on November 25th to purchase $600 billion in mortgage-related assets, the spread between mortgage and treasury rates remained at its highest level on record for the week ending December 4th, closing at 2.96%. Investors sought the safety of treasury securities in droves, increasing their prices, and depressing the yield of the 10-year treasury note to its lowest close ever at 2.57% this Thursday. In spite of rampant speculation that the Fed may be prepard to act again, mortgage securities found few buyers. Mortgage rates averaged 5.53%, according to Freddie Mac.

The 10-week moving average spread entered December at 2.58%.

The mortgage-treasury spread measures the relative risk between mortgage securities and treasury securities. Essentially, the spread is the additional return on investment that an investor requires to mitigage the risk associated with investment in mortgages. The spread has been on an unprecedented widening trend since July of 2007, when it averaged 1.52%. That was the month in which the collapse of the secondary mortgage market accelerated.

There has been significant talk this week of a "Flight to Safety", a market phenomenon in which investors seek the investment most likely to preserve the value of their capital. This has been evidenced in the dramatic increase in demand for treasury securites, as they are viewed as risk-free. Due to this higher demand, returns on treasuries are at their lowest levels on record.

Through 2007, the Mortgage - Treasury Spread has increased by nearly a full percentage point as investors worries have not been assuaged by a bevy of government actions.

Still, opportunity exists to correct the current market situation. The "4.5% plan" is still a possibility, although news indicates that its reporting may have been quite premature. Additionally, proceeding with such a plan could likely be a profitable venture for the US Treasury, albeit one that sets a risky precedent. By issuing treasury debt to fund purchase of mortgages, the Treasury would be earning a roughly 2% return on its investment, and would likely see capital appreciation in the assets it purchases as mortgage rates fall. However, this opens up concerns that the government may interecede in future crises, and leaves open the possibility that this investment may not pay off.

Today's employment data is also quite discouraing, as 533,000 jobs lost also means 533,000 families less able to meet their mortgage obligations, further reinforcing investor concerns about mortgage assets. Other data suggests that mortgage delinquencies are at an all-time high, as well.

The mortgage market has been looking for a way out of the woods for a long time now. While last week's announcements appeared promising, further review has shown that we are still faced with serious problems to correct. Others have suggested helping families facing foreclosure directly by assisting with their mortgages, this solution only provides limited relief to a strapped economy. Insteady, I hope to see news soon of major government investment in areas that will create jobs, such as infrastructure - roads, bridges, sewers. People with jobs can pay their mortgages, which leads to higher home prices, and more jobs, among other things. Only time will tell.

Dan Hartman is a Senior Mortgage Advisor with Province Mortgage Associates, and an Adjunct Professor with Roger Williams University, and can be reached at (401) 263-8655, or by leaving a comment on this article.

I only have a minute to post right now, but I wanted to make sure you're aware that there has been a dramatic shift in mortgage pricing this morning.

This morning the Fed announced it was going to buy $600 Billion in mortgage assets. This has had a huge impact on rates, with most mortgage rates at least .375% better on RATE than they were yesterday. If you’ve been waiting for the right time to lock a floating loan, or you’ve been waiting on refinancing for a better rate, it’s here. Today is the day to make that move, but don’t hesitate, because this may not be the case come tomorrow, and I certainly wouldn’t hold my breath waiting for next week.

I'll provide more news as soon as I can, in the meantime, I'm reaching out to everyone I can who has been considering a refinance so they can take advantage of this before it' too late.

Dan Hartman

Senior Mortgage Advisor

Province Mortgage Associates

(401) 263-8655

http://www.provincemai.com

Earlier this year, we learned that the Jumbo mortgage was going to be a bit bigger for a time. For a year, the limit for mortgages purchasable by Fannie Mae and Freddie Mac was temporarily increased from $417,000 to as high as $729,750 through the beginning of 2009 as a component of the Economic Stimulus Act of 2008. That date is now fast approaching.

The original purpose of this temporary change was to address a mortgage market problem that arose in late 2007 and early 2008, specifically that demand for securities backed by Jumbo mortgages had decreased precipitously. By opening those loans to Government-Sponsored Agency purchase, the government’s hope was that it would be able to maintain property turnover. For the most part this was a success.

Supplementing the Stimulus Act limit increases, the Housing and Economic Recovery Act passed in August provides for extended loan limit increases in certain markets where home prices are significantly higher than the national average. In these markets, limits will be increased as high as $625,500 for purchase by GSAs and FHA insurance. This will continue through the end of 2009, and can potentially be extended beyond.

We’ve also seen recent releases of information regarding the 2009 limits for Fannie and Freddie loans, and FHA information has been coming out, so let’s take a moment to recap the new limits for single-family homes.

2008 2009

Maximum GSA $729,750 $625,500

Maximum FHA $729,750 $625,500

Local Limits

Rhode Island (all) $475,000 $426,650

Massachusetts FHA

Greater Boston $523,750 $465,750

(includes Essex, Middlesex, Norfolk, Plymouth and Suffolk counties)

Worcester $385,000 $285,200

Bristol $475,000 $426,650

Massachusetts GSA

Greater Boston $523,750 $465,750

Worcester $417,000 $417,000

Bristol $475,000 $426,650

Connecticut FHA

Fairfield $708,750 $511,750

Hartford $440,000 $320,850

Windham $272,500 $271,400

Connecticut GSA

Fairfield $708,750 $511,750

Hartford $440,000 $417,000

Windham $417,000 $417,000

What does this mean for the mortgage and real estate markets? At this point, a majority of our lenders have cut off new registrations of higher balance loans for many areas, getting an early start on the new loan limits. For the most part, I don’t anticipate a major impact will result from this. In spite of the lower loan limits available in our market area, home prices are also significantly lower, and even homes that require rehabilitation under a FHA 203(k) mortgage should be able to be served.

There are two areas I anticipate will be hardest hit on the FHA originations side, specifically Greater Hartford, Connecticut, and Worcester County, Massachusetts. These areas had a very large decrease in their FHA mortgage limits, and, as a result, I think there is a possibility that sales of properties will be impacted by the change in limit. Specifically, I can think of at least one client who is considering some properties in Worcester County, who probably will be affected.

If you have questions about your pre-approval, please double check with your Mortgage Advisor as to any changes in your approval status. If you aren’t working with a Mortgage Advisor, I would appreciate the opportunity to assist you.

Dan Hartman

Senior Mortgage Advisor, MBA

Province Mortgage Associates

www.provincemai.com

(401) 263-8655

Last week, we looked at some of the most significant factors that are considered in condominium approval. Let’s examine the 5 methods allowed for approval of a specific condo.

Fannie Mae / FHA Approval

Fannie Mae and the Federal Housing Administration used to approve condominiums following an exhaustive process that involved extensive questionnaires, appraisals, review of hundreds of pages of condo documents, and, as often as not, site visits. As the housing market has worsened, the expense of performing these reviews was no longer justified. Despite their termination of this process, both FNMA and FHA maintain an extensive list of approved condominiums, and many lenders utilize this list as the basis for accepting condos as collateral.

Limited Review

A limited condominium review can be approved if a project is established, and if the buyer’s qualifications are strong enough. A limited review will be called for in the initial automated approval, and is typically granted only to borrowers with stronger qualifications and larger down payments. Recently, I have only seen limited reviews approved for buyers with at least 10% down payment and 720 credit scores, but for buyers with these stronger qualifications, a limited review is a very simple way to purchase a condominium.

What constitutes an established condominium? To be considered “established”, a condominium must be 100% complete, including all units in all phases, and all common elements, and the unit owners must be in control of the association.

Condo Project Manager

Condo Project Manager, or CPM, is an automated system provided by Fannie Mae that operates for a condominium much the way that Desktop Underwriter works for homebuyers. Once all the relevant information has been gathered, the closing attorney will be asked to provide a specific letter of reference, at which point the underwriting lender will be able to input data from the appraisal, and the condominium questionnaire, hoping to receive a good result from the system. Assuming acceptable findings are returned, no further approval is required for the condo. If not, there is one option left.

Full Condominium Review

Quite possibly the most paperwork intensive process in all of mortgage lending is the full condominium review. Condominium documents typically consist of one hundred or more pages of legal description, plans, and specifications, and must be considered line-by-line in determining eligibility, in a process that typically requires 3-5 business days after all documentation is submitted. Because of the degree of detail required to complete full condominium reviews, not all lenders offer to perform these reviews. If you believe your property may not qualify using the other methods, it is important to ensure the lender you are using offers this option.

A Few Insurmountable Hurdles

We’ve looked at several different methods by which condominiums can be approved. Before closing, let’s take a quick look at a few conditions that make condo financing nearly impossible.

Investor concentration: If more than 50% of the project’s units are owned by people holding them as investments, obtaining institutional financing is nearly impossible. Many Alt-A lenders offered “non-warrantable condo” financing until recently, however most have stopped. NB: the 50% figure will also include unsold units, so in a 3-unit complex, financing the 1st unit in is quite challenging. Recent success has been seen in such complexes where 2 units are sold to separate, owner occupant buyers, at the same time.

Incomplete construction: If construction is still in process for the complex, apart from construction of phases other than the subject unit’s phase, it is very challenging to obtain financing. Banks are concerned that the developer may be unwilling or unable to complete construction, thereby impairing the value of other units.

Ownership concentration: This refers to the percentage of units owned by a single entity, excluding the developer. Banks are concerned that if a single person owns more than 10% of the units in the complex, that person may have enough influence with the condo board to force decisions that are not beneficial to the project as a whole. For smaller projects (10 units or less), this rule is still in place, but is modified such that no owner may own more than a single unit.

Condominium financing is different from mortgage lending on non-condominium properties, but it doesn't have to be scary. Knowing the right way to get a property approved will alleviate most problems. Of course, this is not a comprehensive review, however, it is my hope that this will provide a good overview of the condo approval process, and some of the pitfalls that can be avoided. If you have condominium questions that aren’t answered here, please contact me directly.

Condo photos courtesy of Jim Dusty of Gordon Appraisal, used by permission.