Joe Wilson's Silicon Valley Real Estate Blog

by Kenneth R. Harney - Realty Times, 11/19/08

With all the turbulence and losses in stocks and bad economic news in the headlines lately, you can easily lose perspective on what's really going on in the real estate sector.

For example, new mortgage applications increased last week by 12 percent, according to the Mortgage Bankers Association. Applications from people looking to buy houses with FHA loans were up by 15.3 percent, while applications from purchasers seeking conventional mortgages rose by six and a half percent.

How could that be, with all the grim economic news? Well, remember that there is a huge pent-up demand simmering away out there for housing -- especially from first-time buyers who want to scoop up low-priced deals.

When fixed interest rates drop -- and last week they were down by a quarter of a percentage point -- those buyers start doing the math and getting into the market with offers.

Fixed thirty year rates fell from six and a half percent to 6.24 percent during the week. Fifteen year rates broke below six percent to 5.9 percent, down from 6.14 percent.

Another piece of positive news you may not have noticed: Pending home sales were higher than year-earlier levels for the second straight month -- 1.6 percent higher than September 2007.

Although pending sales contracts were down slightly for the month, in the western states they were up by 3.7 percent, and now stand at an extraordinary 39.7 percent higher than they were at the same time in 2007.

At the National Association of Realtors' convention in Orlando, chief economist Lawrence Yun, warned the delegates not to expect a housing recovery overnight, certainly not with unemployment on the rise. But he projected a slow, steady, multi-year upward trend, with 5.02 million total sales this year, 5.3 million for 2009, and 5.6 million for 2010.

Already sales are up significantly in major markets in many parts of the U.S. Yun specifically mentioned the west coast of Florida, the Phoenix area, Virginia, Long Island New York, Kansas City, Minnesota and Idaho.

So here's the key point to keep in mind as you try to make sense of the headlines: The stock market is NOT the housing market. It's on a whole different set of tracks. And it's been in a highly volatile state for more than a month.

Housing, on the other hand, has already endured its painful correction for two and a half years… is now pretty much stabilized … and is slowing moving toward its cyclical recovery.

Mortgage News Daily, October 25, 2008

Alphonso Jackson, Secretary of Housing and Urban Development (HUD), Friday released a proposed mortgage reform package designed to help consumers better understand the terms of the loans they are considering and offering guidelines for shopping for different products.

The changes, if enacted after a mandatory period of public comment, will reform the 30-year old Real Estate Settlement Procedures Act (RESPA). Chief among the reforms; for the first time HUD is proposing that mortgage brokers and lenders provide consumers with a standard Good Faith Estimate. Jackson said that by offering consumers clearer, more certain cost estimates the average borrower will save nearly $700.

"A lot of the mortgage problems we see today are directly related to the fact that few people fully understand this (the home buying) process," the Secretary said. "Buying a home can be very intimidating. Consumers have had no assurance that the loan terms and closing costs they are offered will reflect what they confront at the settlement table, and that's been one of the factors driving the current housing downturn. Our proposal fixes that. We owe it to the American homebuyer to give them the information they need to make smart choices."

HUD said that the proposed Good Faith Estimate (GFE) will substantially enhance disclosure of all important aspects of the loan, including:

• The interest rate and monthly payment;
  
• Whether the interest rate and principal balance can increase and by how much; and
  
• Whether the loan has a prepayment penalty or balloon payment.

HUD released a draft both of the proposed GFE and of a revised HUD-1, the settlement statement given to all borrowers at the closing on the loan. The GFE is remarkable clear for a government document. It consolidates closing costs into major categories to prevent "junk fees" and displays total estimated settlement charges prominently on the first page so the consumer can easily compare loan offers. In addition, HUD's new proposed rule would specify the charges that can and cannot change at settlement. If a fee changes, HUD proposes to limit the amount it can change. Modifications to modify the HUD-1 settlement statement are mainly to assist consumers to compare actual charges on the HUD-1 with prior estimates on the GFE.

One feature of The Good Faith Estimate is not going to make lenders happy. It would require that lender payments to mortgage brokers (often called Yield Spread Premiums) be disclosed. Lenders have already come out strongly against such a change since it was first proposed by consumer activist groups. HUD said it is its belief that these payments are directly dependent on the interest rates that consumers agree to and therefore ought to be disclosed. However, to ensure that HUD's new proposal would not create a consumer bias against brokers, the Department said it did rigorous consumer testing and found the proposed Good Faith Estimate helped consumers to select the lowest cost loan more 90 percent of the time, regardless of whether the loan was originated by a lender or a broker.

Finally, HUD is proposing that settlement agents read a "closing script" to borrowers at the settlement table and that a copy be provided to the borrower. Each proposed script - there is a different one for each loan type - restates in a clear and specific manner every loan term and also provides a graphic showing borrowers which numbers can change from that provided in the GFE and by how much. This script will provide a ready post-closing reference to the loan.

Mortgage News Daily, October 23, 2008

Home foreclosures fell 12% in September as state legislatures have begun to pass laws to stem mortgage defaults, according to RealtyTrac's U.S. Foreclosure Market Report.

"Much of the 12% decrease in September can be attributed to change in state laws that have at least temporarily slowed down the pace at which lenders are moving forward with foreclosures," said James J. Saccacio, chief executive officer of RealtyTrac.

RealtyTrac noted the foreclosure rate has begun to slow as several states have passed legislation to allow homeowners in distress additional time before foreclosure proceedings are initiated.

"In September, we saw California Notice of Defaults (NOD) drop 51% from the previous month, and that the drop has had a significant impact on the national numbers given that California accounts for close to one-third of the nation's activity foreclosure each month," Saccacio said.

Mortgage News Daily, October 23, 2008

Mortgage interest rates reversed the stunning increases seen the previous week, erasing almost all of the gains seen in fixed rate products according to Freddie Mac's weekly Primary Mortgage Market Survey for the week ended October 23.  

"Long-term mortgage rates fell this week amid news of tame inflation and a weaker housing market," said Frank Nothaft, Freddie Mac vice president and chief economist. "Consumer prices were unchanged in September and core prices, which exclude food and energy products, rose by only 0.1 percentage point, all below the market consensus. On a year-over-year basis growth in core consumer prices remained at a 2.5 percent clip."

During the week ended October 16 the interest rate on 30-year fixed rate mortgages (FRMs) jumped 52 basis points, a one-week change last seen in 1987. The 15-year FRM was up 51 basis points.

During the most recent week the 30-year dropped from 6.46 percent to 6.04 percent with fees and points unchanged at 0.6.

The 15-year FRM this week averaged 5.72 percent with an average 0.6 point, down from last week when it averaged 6.14 percent.

By Matt Carter, Inman News, Monday, October 20, 2008.

SAN FRANCISCO -- Fannie Mae and Freddie Mac are shifting their emphasis from earning the maximum return for investors to pricing their loan guarantees to provide maximum liquidity to mortgage markets while still maintaining minimum safety and soundness standards.

That, coupled with the government's backing of Fannie and Freddie's debt and mortgage-backed securities, could help drive down interest rates in coming months, according to the newly appointed top executives at Fannie and Freddie and the head of the federal agency that oversees them.

During a panel discussion today at the Mortgage Bankers Association's annual meeting, the three policymakers said that in addition to canceling fee increases originally planned for this month, Fannie and Freddie are in the process of reevaluating pricing of their loan guarantees and engaging in a concerted effort to keep existing borrowers out of foreclosure.

"This is a very challenging time," said Fannie Mae Chief Executive Officer Herb Allison. "We're totally open to revising and even discarding practices and habits and traditions we've had in the past. We're looking at everything we do to see how we can serve you and more importantly the American public better."

Fannie Mae this month rescinded a plan to increase an adverse market delivery charge from 0.25 percent to 0.5 percent, and Freddie Mac has done the same. Freddie Mac had followed the lead of Fannie Mae in August in announcing that it would double delivery fees charged on all loans in response to mounting losses -- the increase would have resulted in fee increases equivalent to $1,000 on a $200,000 mortgage.

Allison said further pricing changes could be in store, as Fannie's management looks at the company's required return on capital, and instead of focusing on maximum return on capital, focuses on the minimum return required to ensure safety and soundness.

As I said in the previous post, mortgage rates are very volatile right now. A couple of weeks ago 30 year fixed rate conforming and jumbo conforming loans could be easily found under 6%. In fact just a month or so back these same rates dipped as low as 5.625%! If you look at rates today, you'll see they've jumped up to nearly 6.5%. Expect this volatility to continue for a while until the credit markets stabilize and investors become comfortable with what risks they're assuming by investing in these long-term bonds. In the meantime, how about a little perspective? Take a look at the chart below showing long-term mortgage rates dating back 45 years:

We've gotten somewhat spoiled by rates at this level. Since about 2002 rates have bounced around a mean of about 6%, a level not previously seen since the mid '60s. So, when you're bemoaning the fact that interest rates just ticked up a quarter of a percent, pull out this graph and remind yourself that anything under 7% is historically a great rate.

The recent volatility in the banking system has also created new volatility in long-term mortgage rates. One day an ominous report comes out that scares equity investors and the next day a different report comes out scaring bond investors.  Of course when equity investors get nervous, money moves to bonds typically driving long bond rates down but when bond investors get nervous, they demand a higher rate of return driving long-term rates higher.

So, if you're a prospective home buyer watching and waiting to lock in a great long term rate what should you do? Well, get pre-approved for starters. Pre-approval simply means the lender has formally verified your income, assets and credit and has determined that you're qualified to obtain a particular size and type of loan at that day's prevailing rate. Once you're pre-approved, rates will vary up or down every day until you find your home and "lock" your rate. By getting pre-approved up front, you can watch and wait and try to time your lock to obtain the best rate. If you haven't been pre-approved up front, the several days to one week delay in your ability to lock could cost you a better rate.

Owners of condos and townhomes should be aware of the new federal law requiring retrofit of pool drains. This is a safety issue and you should verify with your HOA management that they're aware of this new law.

Pool Drains Must Be Properly Covered: As a red alert for apartment and condo managers, all U.S. "public pools and spas" as defined must be equipped with anti-entrapment drain covers by December 19, 2008. The suction from pool and spa drains can be so strong as to entrap children, and cause injuries or drowning deaths. Under the new federal Virginia Graeme Baker Pool and Spa Safety Act, a "public pool or spa" includes pools and spas open to the public, as well as those open exclusively to residents of multi-unit apartment buildings or multi-family residential areas (such as condominiums). The new law requires, among other things, that drain covers for pools and spas conform to the performance standard of ASME/ANSI A112.19.8-2007 and that single main drains be equipped with anti-entrapment devices as specified. For more information, visit the Web site of the U.S. Consumer Product Safety Commission (CPSC), which includes a list of manufacturers, given the uncertainty as to whether the supply of compliant drain covers is adequate. Source: S. 1771.

For Buyers and Sellers there's a lot of confusion and concern regarding the widely published drop in median home price in the Silicon Valley. Median home price in Santa Clara County has fallen by some 26% fom its lofty peak last summer. Does that mean all homes have lost 26% of their value? Not at all; unless you're shopping in a location and at a price point where most of the foreclosures and short sales have been concentrated. Median price is simply the price that the middle value home sold for. So, for example if 1000 homes sell in a month and you sort them in order from the most expensive to the least expensive, the 500th home's sale price is the median price. Now imagine what happens to the median price if most all of the homes that are selling are the low-priced foreclosures and short sales which is exactly what's been happening particularly in South county and East valley. The median price gets pulled dramatically lower because there are more low priced homes selling than moderate and high priced homes.  My point is that MOST homes in the Silicon Valley have experienced much more modest reductions in price, maybe 10-15% in total and SOME areas of the valley have done much better. Will home prices continue to fall? Well at this point, most all areas of the valley are showing signs of increased buying activity. In fact, many of the areas that had been the slowest and suffered the largest drops in price are now beginning to pick up sharply. (Listen to the Santa Clara County Association of  Realtors' Sept 30 audio market report here: http://www.sccaor.com/997.0.html)

If Congress passes the financial rescue bill which seems likely, price recovery should be accelerated although how much and how fast remains to be seen. Expect to see a dip during the traditionally slow holiday period, but unless something dramatic and unforeseen happens it looks like valley prices have bottomed and Chicken Little may be eating crow.