Do You Have Enough Equity To Refinance?

One of our clients recently expressed an interest in refinancing their home, given the incredibly low interest rates available today. Before they undertook such an ambitious effort, we thought it extremely important that they gave carful consideration to a more detailed view of current real estate conditions and became familiar with the projected real estate picture. To that end, we prepared a current market study of their home so they could compare it to the market study we had conducted just 60 days earlier.

We wanted to ensure for our clients, the information we offered would help them assess their next move and provided enough information to conclude that it was wise… or not… to invest additional capital into their home… given the current local and world economic climate.

Lori & I have been professional full time real estate practitioners well over two decades. We have been through four of these earth shattering real estate tsunamis but this is, by far, the worst one ever... even though we do see... light at the end of the tunnel, albeit a small dot at the moment.

In the market studies we prepared, we used properties that are as close to similar, to our client's home, as possible. We only used homes in their exact neighborhood and made all appropriate adjustments for differences between each of the 8 homes that have sold within the last 90 days.

We felt it was important that our clients stayed mindful that property values continue to plummet here in the valley. We explained to them that their home lost nearly $50,000 value in the last 60 days. [Side Bar - It is this REALTOR's opinion that until the flood of foreclosures comes to a halt and not until MI companies will once again underwrite conventional mortgages with less than 10% down, communities here in the valley will continue to experience depressed market values.]

The Market Study we conducted in October, of their home, found the value range to be between $190,000 and $275,000 which was consistent with the expected decline from when they first put their home on the market. The market study we concluded most recently now placed the value range of their home between $132,000 and $213,000. You’ll see that the study was conducted in exactly the same search grid, their very neighborhood. These statistical models can be duplicated in nearly every neighborhood in the valley. The value disparities grow wider as the price point of homes increase.

Our clients had already been in touch with a lender, Morgan-Stanley-Chase. The maximum amount their lender would loan on their home was 80% of the appraised value and could be as low as only 75% of the appraised value. We suspect that the appraised figure could come in somewhere around $175,000. Our client owed about $175,000 on their home. If their lender agreed to an 80% LTV (Loan To Value) loan, that would mean that our client would have to supplement their re-fi with about $35,000 of their own money plus any additional closing costs. While their monthly mortgage payment would drop significantly, perhaps as low as $950.00 PITI, if they were successful in securing a loan at 5% interest. The challenge we saw for them was that the recovery time for such an investment could be very objectionable to them... and in fact it was.

The reality is that local real estate industry analysts project, in some communities of Maricopa county, property values could fall an additional 5% to 10% over the next 12 months. If industry analysts and pundants are even partially accurate about the future of the economy and if the downward landslide of property values finally comes to rest in mid to late 2010 and then flat-lines until the end of that year, that would mean that the upward march of property appreciation may not begin until the first ¼ of 2011.

A Few Numbers To Consider

Our clients purchased their home in August 2005 for about $265,000. They spent an additional $80,000 in upgrades, brining their total investment to $345,000.

Given our market studies, let’s assume today their home is valued, by an appraiser, at $175,000. If property values decline even... only... an additional 5% over the next 12 months, such depreciation would devalue their home an additional $8,700 down to $166,250. That puts their property value nearly $100,000 below their initial purchase price of $264,605 in August 2005. Now add in improvements and upgrades they expensed, and you see that the economic ground to make up will be considerable; nearly $180,000.

If we agree that property values will begin their upward appreciation value march by January 2011 and if we use a 20 year historic statistic, here in the valley, of 3.75% annual appreciation, that would translate into our client not recovering, simply the original value of $264,000, until about 2026. If they have hopes of recovering all of their investment, such an aspiration may not occur until 2037. The time could be a bit shorter given the reality that, statistically and traditionally, as real estate markets recover from each cycle of downward trending, the annual appreciation scale may grow by .5% to 1% per year. However… we would wager that it will be decades, if not longer, before the valley or the nation sees the kind of property value inclines that were experienced between 2004 and 2006.

We are hopeful that our clients will give very attentive consideration to investing any additional capital into, what is currently a depreciating asset.

Here’s a really head twister about the word “ASSET”. Dictionary.com defines the word "ASSET" as (a single item of ownership having exchange value). Hummmm… exchange value… hummm… if our clients will need to add an additional $30,000 to $35,000 of their own money… just to obtain refinancing loan approval… is their home truly an “ASSET” at this point in time?

The origin of the word “asset” comes from the French word “asez” – “enough”. Now... there's a real enlightening word, "enough". When is it time to simply call it a day and say... "enough is enough"? One could argue that in today's economy, real estate is hardly an "ASSET". Oh... don’t misunderstand… real estate values will incline and rise again, they always do. The question is, how long is a property owner willing to wait to reach the point of ROI (Return On Investment?)

If you have sufficient equity in your home, to refinance at the terrific fixed interest rates that are on the table today, DO IT NOW. If you wait to see... "...just how low rates will drop..." you might just miss out on a golden opportunity. Simply use good judgment when you select your lender. It is usually best to stay with the lender who currently holds your note. You can usually work out relatively favorable closing cost concessions. Oh yes... the term, "sufficient equity" should not be confused with having to add additional capital to your investment in order to complete the refinance. If you plan on remaining in your home for a length of time that would translate into a recapture of any additional cash investment within a fixed and acceptable period of time, then take the step and make the investment. However... if you're upside down to the magnitude of the example in this BLOG, you may want to rethink carefully if such an investment is a prudent place to warehouse your hard earned dollars.

For buyers, it couldn’t be a better time to invest in real estate, as long as they have the intention of remain in their new home for, at a minimum, of 3 to 5 years. Anything less could prove to be a challenge when it comes time to sell their home. Real estate will always remain the fulcrum that helps balance the economic scales of our economy. The recovery time may take just a bit longer this time, when compared to other cyclical downturns then upswings.

Lori & G-II are licensed REALTORS® with Coldwell Banker Residential Brokerage. They can be reached by cell phone at either 602.574.5674 for Lori or 602.796.5674 for G-II or via eMail at Lori.and.G-II@GoAirForceHomes.info. 

If you would like to chat with us live, simply click the Google Talk Icon.  

From time to time, we get some really great questions from our clients. We thought it would be great to share this exchange and post it to our BLOG.

QUESTION FROM OUR CLIENT: "...G2 regarding the FHA loan I started to remember FHA information from a class I had. The appraiser I worked with did not do FHA and also remember that there are FHA only appraisers at least here in Bozeman. I also remember that many appraisers did not like dealing with FHA because of the restrictions…”

You are correct in that only FHA certified appraisers can do FHA appraisals. However it is most common that FHA appraisers also conduct appraisals for conventional lenders and some FHA certified appraisers may also hold a third certificate, that to conduct VA appraisals.

QUESTION FROM OUR CLIENT: “…I apologize for not understanding more of the process, but why do we have to wait for the underwriter to approve this loan when the buyers were qualified before making the offer and the appraisal came in for the price offered, and what does HUD have to do with this. I thought HUD and FHA were separate processes and requirements...”

LOL… my chuckle is not because of the question but more because you are filled with some of the best questions I have had the pleasure to field, in a very long time… ;-)

FHA (Federal Housing Administration) insures lenders against loss in the event that borrowers default on their loans. FHA's mission has always been to encourage lenders to make loans that have higher default risk than traditional conventional loans. The FHA was actually given birth in the wake of the Great Depression of the 1930s. Lenders had all but stopped making loans of any kind. Enter the Federal Housing Administration.  Today, FHA's roll has a very similar face to the one it projected as our country healed itself from the wounds of the Great Depression. FHA continues to insure, NOT GUARANTY, loans to low-and-moderate-income home buyers, who may have somewhat questionable credit or who find it difficult to come up with the required cash to complete the transaction.

HUD (The Department of Housing and Urban Development) is a Federal agency, with Cabinet Level authority, and is a voice for the consumer. HUD is responsible for ensuring that all fair housing laws are enforced, as well as assisting in the Nation's development of communities that address America's housing needs. HUD plays a major role in the loan approval process by underwriting homeownership for lower to moderate income buyers through its Mortgage Insurance Program, also known as MIP. In the conventional arena, this type of insurance is referred to as PMI.

Both insurance programs do a similar job of protecting lender's from financial disaster in the event of a mortgage failure or default. MIP is a HUD insurance product and PMI is a private sector insurance product. The larger private MI companies are Genworth (Genworth Mortgage Insurance), MGIC (Mortgage Guaranty Insurance Corporation), RMIC (Republic Mortgage Insurance Company) and Radian (Radian Mortgage Insurance). These companies set the tenor of the Mortgage Insurance industry and play a heavy roll in loan approvals.

At the end of the day, and even though a loan has been given the Stamp of Approval by the Fannie Mae or Freddie Mac, DU (Direct Underwriting) or LP (Loan Prospector) computerized loan approval systems, federal lending guidelines still require the final loan package to be submitted for an “Eyes-On and Hands-On” review by a human being.

Now to the point you made about the buyer being qualified or pre-approved, that is still the case, assuming the buyer has done nothing to jeopardize their loan approval such as buying a big ticket item like a Hummer or an Air Plane or a pair of Jet Skis or… well you get the picture. The other part of any loan approval is the property. Even if the buyer is made of GOLD, a loan can still fail if the property does not pass muster. That is why all FHA Loans have an additional FHA requirement of the FHA Amendatory Clause. The FHA Amendatory clause states that the property MUST appraise for, at a minimum, the price agreed to between the parties… or the FHA loan will not be granted. The appraised value referrers to the value that is finally approved by the underwriter. Therefore, if a FHA underwriter requires an Appraisal Review and if after the Appraisal Review is completed, the review appraiser finds a different “opinion of value” it is most likely that the FHA underwriter will devalue the properties value to that of the review appraisal. I shared a very real scenario of this type of goings on a while back when I sent you two appraisals for the same property, wherein the underwriter devalued the first appraisal, that came in at contract price, down by about $7,000.

I don’t want to put more squirrels in your stomach. But you have to be mindful of the nuances of the lending and appraisal world as it is today. All of yesterdays and yesteryears methodology is off the table. It’s a new day and a new world and we’re all stuck right in the middle of it.  It’s simply a box of rocks that ALL FHA buyers and sellers must deal with. 

(We forwarded a copy of the Preliminary Appraisal Report for her records. We explained that, as long as the FHA/HUD underwriter did not flag the appraisal for an appraisal review, the appraisal submitted would be the document that would stand as the accepted appraisers “Opinion of Value” by the FHA underwriter.)

We hope this exchange will help clear up some of your questions as you engage your next real estate transaction.  Oh yes... at the end of the day, the FHA underwriter approved the appraisal for the contract price.

Lori & G-II are licensed REALTORS® with Coldwell Banker Residential Brokerage. They can be reached by cell phone at either 602.574.5674 for Lori or 602.796.5674 for G-II or via eMail at Lori.and.G-II@GoAirForceHomes.info.

If you would like to chat with us live, simply click the Google Talk Icon.

As the Phoenix valley real estate market continues to deteriorate and more and more properties hit the market as REOs, also known as Foreclosures, property values continue to plummet. On Tuesday, November 25th, Adam Kres, reporter for the Phoenix Business Journal wrote " Home prices continue to plummet across the country, and Phoenix is leading the way. According to the S&P Case-Shiller Home Price Index, values in the Phoenix metro area are down nearly 32 percent compared with third-quarter numbers of 2007. Kress went on to write… of all cities in the national index, Phoenix posted the biggest loss in home values..."

It is time for short sale loss mitigation specialists to step to the plate and offer more in the way of cooperation with sellers who are in financial distress. The information shared in this video will better inform loss mitigation negotiators, their employers, investors and MI Company that in most cases when an offer is presented at market value or above, it is in the lender’s best interest and in the best interest of their investor and MI Company’s to accept the offer that has been presented.

In nearly every instance the seller has made it perfectly clear to their lender, or lenders, that the seller is in no position to repay any portion of the deficit that will be realized from the short sale of their home. As long as the prospective buyers are well qualified and ready to close on the property within 20 to 30 days, or less, of an agreement from seller’s lender to approve this Short Sale, current market conditions strongly suggest that the short sale should be approved by all factions within the seller’s lender’s collective of decision makers.

The following are examples of the potential financial devastation that awaits a lender who fails to work toward an amicable short sale closing. The following examples are consistent with the tenor of the Phoenix real estate market and I would suggest that this scenario will play out over and over again across the country.

In our first example, a property comparable to a current short sale listing, located on Mary Jane LN in Glendale Arizona was listed as a short sale between the months of November 2007 through the end of January 2008 for a list price between $200,000 & $197,500. All short sale negotiations failed with the lender, Countrywide Home Loans. Countrywide subsequently foreclosed on this property. After the foreclosure process Countrywide listed the property with a local brokerage and sold the property, as a REO for $144,000, a 27% loss in potential captured revenue. Had Countrywide agreed to the short sale offered months earlier, Countrywide could have sold the home for $53,000 more.

A second example is another comparable property located at on 56^th Avenue in Glendale Arizona. The property was listed as a short sale between the months of October 2007 through the end of May 2008 for a list price between $216,000 & $205,000. Again, all short sale negotiations failed with the lender… this time Citi Mortgage. Citi Mortgage later foreclosed on this property. Again, after the foreclosure process, Citi Mortgage listed this property with a local brokerage and sold the property, as a REO for $157,250, a net loss of 23% of potential captured revenue. Had Citi Mortgage agreed to the short sale offered, months earlier, Citi Mortgage could have sold the home for nearly $50,000 more.

In both examples, these figure do not account for any additional costs to Countrywide Home Loans or Citi Mortgage and their investors, such as the cost of the foreclosure procedure, possible eviction action of the owners, tenants or vagrant squatters, loss prevention and security, maintenance, repairs, H.O.A. dues, cost of sale and other internal fees that impacted reserves required under federal banking regulations to be maintained by Countrywide and Citi Mortgage and possibly their investors. Countrywide and Citi squandered an opportunity to resolve the state of the owner’s home loans.

Such misgivings of logic are exactly the kinds of events that continue to sustain the downward spiral of property values in Phoenix and across the nation.

Examples PDF

Real estate market conditions continue to deteriorate. Phoenix leads the nation in declining values. As I noted in the beginning of this video, between the third quarter of 2007 and the third quarter of 2008, property values plummeted 32%. Every month a property valued at $160,000 remains UNSOLD, the value declines an additional 2% or about $3,200.

Loss mitigation specialists and their employing lenders have an opportunity to eliminate the need to expend additional funds on foreclosure procedures, possible eviction action of vagrant occupants, loss prevention and security, maintenance, additional repairs, unpaid H.O.A. dues and fines, city and local municipality fines, cost of sale and other internal fees that could impact the lender’s reserves required under federal banking regulations to be maintained. Short Sale offers provide a chance for the lenders to resolve the current state of the owner’s home loan and mitigate their financial damages.

If lenders fail to complete successful Short Sale transactions between potential buyers and seller in distress but choose rather to execute their foreclosure rights, the lenders will participate in a very factual reality of real estate market dynamics. Here in Maricopa County REO properties tend to be listed below actual market value, statistically selling for up to 24% less than market value while Short Sale properties can sell for as much as full market value with minimal discounts below that point.

It is important that every realtor who is aggressively working with short sale listings take time to demonstrate these very real numbers to the banks loss mitigation negotiators they interact with.

G-II is one half of Lori & G-II’s eTeam of Professional REALTORS® with Coldwell Banker Residential Brokerage. Lori & G-II are Short Sale Specialist in Maricopa County Arizona. If you are a seller, in need of short sale assistance, please feel free to contact us at 602.796-5674 or eMail us at Lori.and.G-II@RealEstateInPhoenix.net for additional information about the Short Sale process.

The Fight for Down Payment Assistance Is Not Over Yet

We received an eMail from NAR this morning. The post contained a pre-drafted letter for REALTORS® to print and send to their Congressional Representatives. While the letter is spot-on, we see an opportunity to add one more bullet point to the letter, that being to urge our Congressional Representatives, to support HR 6694 "FHA Seller-Financed Downpayment Reform and Risk-Based Pricing Authorization Act of 2008". To that point, we have included our version of the NAR letter in hopes that you have, our reader, have a vehicle to distribute our HyBrid letter to supporters of HR 6694. Download Our Version of the NAR Letter NOW! (Microsoft Word 2003 Format - MacAfee & Norton Safe)

All the sender needs to do is locate their representative’s mail address, type in the name of their senator and congressman/congresswomen in the places indicated and enter the sender’s information at the bottom of the letter then send it off. CLICK HERE to locate your state House Representative and CLICK HERE to locate your US Senator and tell him or her that you want them to support and vote for H.R. 6694

We are also in the process of posting version of the NAR letter on our all of our BLOGs and on all of our personal web sites.

* Down Payment Assistance Rescue H.R. 6694
* Part 2 - Down Payment Assistance Rescue H.R. 6694
* Congress Stabs FHA Buyers Through The Heart
* Congress has stabbed the FHA buyer through the heart. The little guy pays the price again.
* Down Payment Assistance Rescue H.R. 6695

We have also contacted three local TV News Outlets with our efforts.

We continue to try and push HR 6694 to the floor of the House and Senate.

Oh yes... one more quick side bar for our VA Home Owners; many Vets man not know that the VA has been authorized by the passing of the "Veterans’ Benefits Improvement Act of 2008" to offer refinancing of their sub-prime mortgages at a 100% Loan To Value (LTV). Prior to the signing of this bill into law by President Bush on October 10th 2008, the maximum loan amount allowed was only 90% LTV. If you are a Veteran with an available VA Loan Entitlement, you should contact your mortgage company and look into a VA Refinance of your current mortgage.

For more information about this new law, visit Re-Finance Program for Vets.

Lori & G-II are licensed REALTORS® with Coldwell Banker Residential Brokerage, specializing in VA Buyer Representation. They can be reached by cell phone at either 602.574.5674 for Lori or 602.796.5674 for G-II or via eMail at Lori.and.G-II@GoAirForceHomes.info.

Short Sale Experts, Certified Negotiation Experts, ePRO 500 Certified
Mentors and Trainers for Coldwell Banker Residential Brokerage
Coldwell Banker Residential Brokerage.

Re-Finance Program for Vets

For the past year or so, the economic condition of our nation has been splashed all over the Paper News Media, TV, Radio, the WEB and heck... I even think I saw a courier pigeon delivering some bad economic news the other day. Not really... but it has been nuts, not only on Wall Street but on Main Street as well.

We are always on the hunt for new finance platforms for our members and clients. And... to that end, we have some really cool information to share with our Vets, active duty and retired in all branches who qualify for a VA Guaranteed Home Loan. This is a national finance tool that could help thousands, perhaps hundreds of thousands of Vets, who are stuck in adjustable rate sub-prime mortgages.

For our Vets!
There has been much ballyhoo over all of the economic stimulus packages that have been pushed through Congress over the past few months. But... there was very little fanfare given to one of the most useful VA Loan tools our nation has ever seen. Finally, Congress did something to help Vets... before they go down in flames.

Sponsored by Senator Daniel K. Akaka of Hawaii - House Armed Services Committee, in December 2007, the bill was originally simply a resolution supporting the goals and ideals of a National Medal of Honor and to celebrate and honor the recipients of the Medal of Honor on the anniversary of the first award of that medal in 1863. The original bill did not contain any provisions for VA Loan Modifications. However around May of 2008 Senator Akaka introduced S. 2961 a bill to amend title 38, United States Code, to enhance the refinancing of home loans by veterans. Finally in June of 2008 the bill was passed unanimously by the Senate and subsequently signed into law by President Bush on October 10th 2008.

So what is the new law? Simply put the new law states;

*** SOURCE "...The new law makes changes to VA's home loan refinancing program. Veterans who wish to refinance their subprime or conventional mortgage may now do so for up to 100 percent of the value of the property. These types of loans were previously limited to 90 percent of the value.

Additionally, Congress raised VA's maximum loan amount for these types of refinancing loans. Previously, these refinancing loans were capped at $144,000. With the new legislation, such loans may be made up to $729,750 depending on where the property is located.

Increasing the loan-to-value ratio and raising the maximum loan amount will allow more qualified veterans to refinance through VA, allowing for savings on interest costs or even potentially avoiding foreclosure..."

Click here for a complete copy of the new VA Instruction Letter. (PDF format)

What a GREAT tool for our Vets to have at their disposal. Now... the next thing in my cross hairs is to see if Vets with mortgages that encumber the home for more than current market value, will be successful in getting the banks who hold those notes to release and discharge their debt and allow the Vet to secure a VA loan at the current market value. If this can happen, tens of thousands of Vets could finally find relief in this collapsing economy.

We'll report on more GREAT finance options for non-military buyers in our next post.

Lori & G-II are licensed REALTORS® with Coldwell Banker Residential Brokerage. They can be reached by cell phone at either 602.574.5674 for Lori or 602.796.5674 for G-II or via eMail at Lori.and.G-II@GoAirForceHomes.info. If you would like to CHAT with us LIVE, simply click the Goggle Talk icon.