Sometime in the beginning of 2007 I changed the title of my Active Rain blog to "New Day in Real Estate". The reason I did so is because the ripples of change were already being seen in the lending industry. I used the parallel last year in a blog of a giant wave of change beginning with an article titled, "Short Sales: The Coming Tsunami". What we could see on the mortgage banker's table and had been discussing since late 2005 was how all of the ridiculously loose guidelined non-conforming mortgages would eventually impact the housing industry. Most of what has happened was expected by conforming mortgage bankers if not most of the industry.
In this blog there are some very important points that, while expected, have actually gone further than expectations had indicated. Perhaps the most important is PROPERTY VALUATION.
My NOVATION MORTGAGE does not fund a majority of non-conforming (sub-prime) loans but the percentage is not to be dismissed. In 2006 approximately 22% of our loans were non-conforming due mostly because of the great number of non-owner occupied properties we finance.
Let's define "investors" for the purpose of discussion: investor is the buyer of a mortgage backed security. There are the "Wall Street" buyers who purchase mortgage backed securities (you may call them notes) on the secondary market. The secondary market is simply the marketplace where lenders sell their mortgage notes to investors who invest in mortgage backed securities. These buyers are the ones who really control what the lenders do and do not offer to clients. For the sake of this discussion we are talking about non-conforming loans. Which brings me to a list of points real estate agents, real estate investors and home owners need to hear:
SEASONING ON TITLE - Many investors are now wanting to purchase high LTV mortgages (more than 80%) offered only on properties where the seller had a minimum of 90 days on title and as much as 12 months on title. In the very recent past many lenders would do same day or "simultaneous" closings. This meant a real estate buyer could acquire a home and then resell it the same day or even at the same closing table. You may also know these as back-to-back closings.
NO DOC LOANS - while still available are increasingly rare and expensive. While just a few months ago no doc loans for owner occupied properties were overly abundant it is virtually impossible to get a full LTV loan (100% of the sales price) no doc and very costly even with a moderate down payment.
PROPERTY VALUATION - read this next line out loud, please: Lenders are slashing values on appraisals. Now rinse and repeat. Some lenders are using AVM's and calling the BPO's. Some lenders are using BPO's that are incomplete appraisals (CMA's and maybe no more) to counter the values provided by certified appraisers who have visited, measured and researched the property. Even with strong rebuttals and additional comps values are being slashed by as much as 20%. THIS IS NOT LIMITED TO NON-CONFORMING LOANS.
These are points to be considered at all levels of real estate. Mostly prior to LISTING a property or OFFERING on a listed property. I am encouraging NAR state members and individual members to consider this when you are completing the "Financing Contingency" on your broker buyer agreements. If you are leaving only 10 days for approval you may be asking too much from the buyer in this volatile marketplace.
There are still high LTV loans, there still are unseasoned loans, there still are non-conforming loans but the entire industry has changed. Some people who could purchase a home two months ago cannot purchase one now. As always it's the weaker ones who are most hurt.
IF YOU ARE A BUYER or BUYER'S AGENT and you receive a Purchase Agreement that says you will lose your earnest money if you do not have your financing APPROVED within any number of days less than 14 strike that line and do not agree IF you have any reason to believe you may be affected by changes in the lending industry. If you already know the property has a clear title, the owner has held the property for at least six month, the value increase (regardless of upgrades) is not greater than 25% of the sales price and you are paying at least 10% down you shouldn't have any problem getting your financing approved within a short time PROVIDED you comply with the lender's request to show evidence of income, assets or whatever they request.
For a short period of time (2003 to 2006) it was possible to "out improve" the neighborhood by several percent in value. Not now. Comparable SALES (not LISTINGS) once again rule the value. In essence if you buy a $250,000 home in a $250,000 neighborhood and put $50,000 into the kitchen, bath and finishing the basement your chances of recovering your investment just dropped tremendously. I did not say it can NOT be accomplished, I said it is not as EASILY accomplished as it was as recently as February of this year.
I do receive a few questions and comments directly from Active Rain readers and I am always happy to answer your questions within the scope of my knowledge and experience. If you have further questions about this feel free to email me directly and I will answer as quickly as possible.
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