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Which offer should a San Diego home seller accept during the COVID shutdown crisis?

Q- Which offer to buy your home should you accept?

A- The highest net offer which is most likely to close.

 

That seems obvious, doesn't it, Let's consider the second part of the answer though. An old friend and Phoenix real estate broker Greg Swann, was promoting this new listing on his Facebook and asked me this question:

 

Q- Can you reflect on the current state of borrowers? I've never loved FHA-ish loans, especially not in cash-poor offers. Obviously, everyone loves cash, and 80/20 conventional is hard to turn down. Are government loans still doable? If so, are they more or less risky to close than they were two months ago?

 

My answer is:

 

Great questions. Government loans are fine and, based upon whom the buyers may be, might be preferable. Here is the biggest concern from a lender/servicer's point of view; will the new buyers start deferring mortgage payments under the blanket of COVID?

 

Lenders are going to verify employment before the loan is approved, right before the loan docs are drawn, and right before they fund the loan-- yes, three times.

 

How might a seller mitigate that risk? Consider the buyers' jobs as well as their qualification standards. "Essential" workers are good buyers but government-funded paychecks are the best buyers.

 

If presented with a VA offer, from a Staff Sergeant at MCAS Miramar, take it. If presented with a VA offer, from a Navy veteran working for a start up, scrutinize it.

 

If presented an FHA offer from a Law Enforcement Officer, take it. If presented an FHA offer from a security officer for an office building, scrutinize it.

 

If presented a 40% down conventional offer from a business owner, scrutinize it. If presented a 20% down conventional offer from a public school teacher, take it.

 

The old saw "money cures all problems" isnt applicable anymore if there is a loan involved.

Each acceptance should have an addendum and/or counter which states that the buyers lock their interest rate within 24 hours and order the appraisal within 48 hours of acceptance.

 

Unless you have a cash offer, there is ALWAYS going to some risk that the loan is declined. Most lenders are looking for a 680 minimum credit score for conventional loans and a 640 minimum credit score for VA/FHA loans. Downpayment matters only inasmuch it can mitigate a low appraisal. Ability to repay a loan, especially in a time when forebearances are handed out without much scrutiny, has underwrters worried about the continuity of the income and employment.

 

It's a whole new world in mortgage lending...AGAIN. As always, Debra and I can help you

 

Call or text Brian at 858-699-4590. Call or text Debra at 858-228-0617

VA home loans and FHA mortgages could be shut off as early as April 15, 2020

Want to hear something scary? Mortgage industry association executive Anthony Casa thinks VA and FHA lending will cease to exist as soon as April 15, 2020. He breaks it down for mortgage brokers in this 9-minute video.

 

If you don't want to watch Anthony's video, mortgage trainer Barry Habib explained the VA/FHA liquidity crisis in this long article.

 

I might suggest that you watch Anthony's video and read Barry's article if you are a REALTOR who services veterans and first-time homebuyers. If you don't want to watch the video or read the article.

 

Here is an explantion (pay close attention to emboldened statements)

 

There are four major particpants in the mortgage market:

 

1- lenders (originators)

2- servicers (collect monthly payments and remit them to investors)

3- investors (for VA/FHA loans, those are GNMA pass-through securitires)

4- Wall Street (hedges interest-rate risk for lenders and packages loans sold from servicers to investors)

 

Servicers buy loans from lenders and sell them to investors (through Wall Street) for a cost of about 1% of the loan amount-- they earn about .35%/year in fees for servicing the loans. Thus, servicers need to hold a loan for about 3 years before they make a profit.

 

Lenders lock interest rates for borrowers, guaranteeing the terms from the application date through funding date. Without getting into the technical details, it costs lenders about .25% of the loan amount to hedge that interest rate risk through contracts with Wall Street.

 

When the Federal Reserve makes a huge drop in the Fed Funds rate, and intervenes in the market by directly buying mortgage-backed securities, it has unintended consequences:

 

1- Borrowers break interest-rate loacks with lenders and switch the loan to another lender-- lenders who "paid" that .25% to hedge the interest rate risk dont recover it with a loan funding and are out that money-- that eats into the lenders' capital and Wall Street requires them to put up more cash as collateral for future rate locks (which they may not have)

 

2- When loads of people rush to refinance the loans they took out less than 18 months ago, servicers "lose" the premium they paid for the servicing contract, Servicers typically borrow against their servicing contracts to buy more loans, using those servicing contracts as collateral. If that collateral disappears, Wall Street issues a "margin call" to the servicer, asking them to put up more capital (which they don't have)

 

This is no big deal is it happens over a period of 3-12 months (as it has in the past) but when it happens in a 2-3 week period, the whole mortgage industry gets hit with a margin call-- both lenders and servicers are scrambling for capital they dont have.

 

3- But wait, there's more bad news. You know how the federal government is trying to "help' borrowers by staying foreclosures for a 90-day period? That hurts the servicers even MORE. When the borrowers dont make their mortgage payments, the servicers STILL have to remit those payments to the investors, draining their capital even MORE. It's like that scene from the 90s movie Goodfellas.

 

There is some hope. GNMA announced yesterday that they will try to alleviate the third problem but the first two problems still exist: lenders are getting burned on locks and servicers are losing their shirts on rapid refinances.

 

The problem wont last forever but we may see major changes (for the next 4-12 weeks) in the VA and FHA loans markets. Here is what to expect:

 

1- borrowers may not be able to lock rates until they have full loan approval

2- some lenders could go out of business altogether

3- some lenders could delay loan closings because they have a liquidity crunch

 

Call us to plan for this market interruption. 

HIgher Loan Limits in Southern California for 2019

The 2019 San Diego County loan limit is $690.000, up from $649.750 in 2018.  

In Orange & Los Angeles counties, it's $726.525 and in Riverside, San Bernardino, and Imperial counties, it's $484,000.

 

The higher loan limit affects FNMA, Freddie Mac, and FHA loans. For VA loans, the county limit is for zero down payment loans ONLY.   VA loans have no loan "limit"  but may require a down payment for prices over the county limit. Read about how to calculate the VA downpayment for purchases over $690,000 here

This year, the FHFA published this interactive loan limit map, showing the loan limit for every county in the US.

For fun, compare the 2016 Presidential election map (by county) with the FHFA interactive loan limit map.  If you click both links, the maps will open side-by-side

There are STILL great real estate investment deals in San Diego

Yes, you can still make money in San Diego real estate and no, I dont know if property prices are going to drop. Here is what I DO know; there is a housing shortage in San Diego and rental rates should keep rising.

 

This means that, if you buy a property at the right price, and intend to hold it for 7-10 years, you should really make some money. Let me share with you the most recent transaction I handled for an investor. I represented the investor and my wife Debra handled the financing.

 

Our investor bought a Mission Valley 2 BR, 1 BA condo for $355,000. We closed on it three days ago (June 12)   She put 30% down and, with closing costs, it cost here $113,000 cash-to- close. Her mortgage payment, including taxes, insurance, and HOA fee is $2096. You can see the whole financing breakdown here

 

I immediately advertised it for rent on Craigslist, Zillow, Trulia, Hotpads, and Cozy at $2095/month. Yesterday (June 14), we signed a multi-year lease with a tenant who has a credit score of over 750.   In two days, my investor signed a lease which covers all the debt servicing expenses.

 

I think rising inflation will double San Diego real estate prices in the next 10-12 years but, with just a 4% inflation rate, this property should sell for $525,000 in 2028. At that point, my investor will walk away with about $300,000, almost triple of what she invested today.

 

Was this easy?

 

Absolutely not. I toured over 40 properties for her and only showed her properties which met three criteria:

 

1- They were "clean", meaning it would cost less than $1500 in cosmetic repairs to move in

2- They were in a San Diego neighborhood which was in demand.

3- They had been on the market for 21 days and could be purchased for a price which produced positive cash flow with 30% down payment.

 

She spent a 4 hour period with me and saw 7 properties. She offered on three of them, we negotiated with two sellers, and settled on the Mission Valley condo

 

It wasn't easy for me but I made it easy for her, and now she has a great investment.

 

Want me to do this for you?

 

Call me at 858-777-9751. We'll meet for lunch and I'll listen to your investment needs and goals. If they match up with what I am doing, I'll find the perfect investment property for you. If not, we'll have a great time catching up with one another.

HIgher Loan Limits Announced for 2018

FHFA just announced the new (higher) loan limits for 2018. You can see each county's new loan limit here but this is the summary for Southern California:

 

• San Diego County $649.750
• Ventura County $672.750
• Orange and Los Angeles Counties $679.850
• Riverside, San Bernardino, and Imperial Counties $453,100

 

FHFA sets loan limits for Fannie and Freddie backed conventional loans but, over the past few years, FHA and VA has followed their lead. We expect the VA and FHA loan limits to be the same as the FHFA loan limits.

 

What does that mean?

 

It means more buyers can afford more homes and that's good news for you. If FHA and VA follows (we think they will), fundings could be tricky in the next 60 days. If you have clients who are banking on that higher loan limit, you should call us at 858-777-9751 before you enter escrow so we can determine a strategy so they can get a loan for the higher amount.

I can't think of a better time to be a San Diego County listing agent...

...and a worse time to be a San Diego buyers' agent.

San Diego is in a housing crisis and the simple explanation for it is that we have a tremendous backlog of new housing--the politicians aren't helping us either. NIMBY-ism, water restrictions, and traffic density are core issues which restrict housing and, while they are legitimate issues, the county has a 65,000 unit backlog of new housing.

Experts believe that San Diego County needs 170,000 housing units built from 2012-2025 to meet demand and population growth- some 15,000 housing units each year. Over the past five years, San Diego County has averaged 2000 new housing units.. We are already 65,000 units behind and, if we continue at this anemic pace, we will end up 120,000 housing units short in 8 years. That is pushing up prices of existing homes.

You might think that rising housing prices, and double digit rent increases, will halt population growth in the County. While it might, SANDAG believes the region will grow by another million people within 25 years. Increased demand for housing and restricted supply means one of two things to your clients: they have to move out of San Diego County or home ownership is now, more than ever, the only defense against this housing shortage. Your role, as a buyer's agent, is now more important than ever to your clients' futures.

We are here to help you--here are three ways we can do that.

1- TBD approvals: this isn't a pre-qualification, this isn't a pre-approval, this is a full underwriting approval for the buyers' credit and income. We take an application, gather up supporting documentation, submit the file to the underwriter, and have a clean approval within 5 business days. What this means is that we can close a transaction in 21 days, giving your buyers a competitive advantage when they make offers.

2- "Selling" the buyer to the listing agent: a lot of the buyer's agents we work with ask us to speak to the listing agent when they make the offer. We communicate to them that we have that underwriting approval and, more importantly, tell them exactly what that means. It means that the only issues for a full loan approval are property related: appraisal, homeowners insurance and title insurance. When we explain the process to the listing agent, and represent the strength of the buyer, more offers get accepted.

3- VA and FHA condo approvals. So many condominium buyers are shut out because the complex lacks an agency approval, The perception is that VA and FHA condominium complex approvals are burdensome and lengthy--nothing could be farther from the truth.  Debra and I are experienced experts at VA condo approvals-- we have approved over 130 of them in the past 8 years and we get those purchase transactions closed in 45 days or less.  FHA condo approvals are easier for us because we have a HUD-delegated underwriter who has the ability and discretion to approve the complex FHA-eligible

This is a great time to be a real estate agent in San Diego County, especially if you list a lot of properties.  Representing buyers however, is difficult.  We're here to make that job easier on you.

WTH Just Happened to the FHA Mortgage Insurance Premium? Politics At HUD

If you have an FHA loan in process this month. you were "given a gift" only to have it "taken away" nine days later.    It was a political stunt by past HUD Chairman Julian Castro and it's a darned shame it happened to you.  Let me break it down for you:

The FHA charges borrowers money to insure their loan against default.  It adds 1.75% to your loan and charges a monthly mortgage insurance premium in addition to that added 1.75%.  You can avoid this by having at least a 20% down payment and getting a conventional loan (although FHA rates are lower than conventional rates)

The FHA monthly mortgage insurance premium WAS  based on an annual charge of .5% of the loan amount prior to the Obama Administration taking office.  During the housing crash, the FHA insurance pool (the money collected from the premiums) was depleted because of all the foreclosures.  The first term Obama HUD Secretary (Shaun Donovan ) started to increase the monthly mortgage insurance premium cost, from the annual charge of .5%,  to an annual charge of 1.4%.  This increased the monthly cost of a new $400,000 FHA loan  from $166/month to $466/month.

This was a bummer for new FHA borrowers because they were essentially paying for the failures of the past borrowers.  Still, if FHA was going to be sustainable, it had to do something so they opted this approach. It worked.  The FHA insurance pool grew from being depleted to sustainable.  As the size of the FHA reserve pool increased, the HUD Secretary during Obama's second term (Julian Castro)  started reducing the monthly mortgage premium from an annual charge of 1.4% to its current annual charge of .8%.  This reduced those monthly mortgage costs (on a $400,000 loan)  from $466 to $266.  

A few months ago, HUD Secretary Julian Castro floated another premium cut from its current .80% annual cost to .55% annual cost.  This would reduce the monthly cost (on a $400,000 loan) from $266 to $183.  This move was met with vocal opposition from career HUD bureaucrats and the Republicans in Congress.  The prevailing thought was to leave the annual FHA mortgage premium be for now and let the reserve fund grow more. 

HUD Secretary Castro ignored the advice of career HUD bureaucrats and issued the order to cut the FHA monthly mortgage cost anyway.  He issued this order on January 11, 2017 to take effect for loans FUNDED after January 27, 2017.  I thought this was suspicious when he issued it because all previous HUD orders were effective for loans STARTED after the effective date.  This seemed "too good to be true".  

If it looks too good to be true, it usually is untrue.  HUD Secretary Castro's order, breaking with normal HUD policy on effective dates, was a legitimate HUD order anyway.  We (like other lenders and REALTORS) delayed closings so that borrowers would benefit from the monthly cost reduction.  Here's what you need to know:

Castro's FHA order to reduce costs was never gonna happen and Castro knew it when he issued it on January 11, 2017.

Castro was playing politics with borrowers' money.  His intention was to put the new HUD Secretary (Dr. Ben Carson)  and the new President into the tough spot of saying "Sorry.  This was never a good idea".  As such, Castro timed the repeal of the January 11, 2017 FHA order to come out just an hour before the new President was inaugurated.  Castro was quick to release this repeal order to the media so that it could run with the story that "The New President RAISED FHA monthly mortgage costs".  

Let me give you a simple analogy:

I am the principal of  a school and you are taking my job next Friday.  Last month. I asked all the teachers if we could cut the dismissal time from 3PM to 2PM,  The teachers said "this is a bad idea" and you (the new principal) agreed with the teachers. Last week, I ignored the teachers advice and sent an email to all of the pupils saying that the new dismissal time would be 2PM, effective the Monday after you become the new principal.    My last act as principal, before I hand you the keys to the school, will be to send an email to the pupils saying "Sorry, the new principal might be a meanie so I can't keep that 2PM promise to you".  Guess who won't be popular with his new pupils next Monday?  You.

It's political scheming and it's garbage.  The Obama Administration took a parting shot at the incoming Trump Administration and, if you have an FHA loan in process, you are the loser in this political game.  In my opinion, the incoming Administration should honor the reduction for 30 days and restore the (higher)  premium for loans funded after February 28, 2017.  They might not have time to do that and I don't make policy so, if you have an FHA loan in process, expect to pay the original (higher)  amount.

 

San Diego Mortgage Rates Report: January, 2017

WHERE ARE SAN DIEGO MORTGAGE RATES GOING?

Non-farm payrolls reported today at 156K vs. the expected 178K;  the unemployment rate ticked up to 4.7%. The mortgage bond market is DOWN a quarter point. That doesn't compute.

Today's released data also signaled an uptick in wage growth. Uh oh, that means we are seeing inflation, right?

Not so fast. As Debra points out, a lot of minimum wage laws were passed; 19 states raised the minimum wage effective Jan 1. Businesses often meet those laws prior to the effective date to be in compliance.

The wage growth is probably just a reaction to legislation rather than organic growth. It's a "false positive".

I still think we see lower mortgage rates at the end of January and higher mortgage rates at the end of the summer. If you want to know how this would affect you, call me at 858-777-9751.  A real conversation, with someone who has worked in capital markets for three decades, will give you greater insight

FHA To Lower Owner Occupancy to 35% For Condo Approvals?

HR 3700 passed the House of Representatives (437-0) on Monday, February 2, 2016 and was referred to committee.  Three key provisions of the bill are:

1- reduce the owner-occupancy requirement, for FHA-insured condominium approvals, to 35% (from the current 50%)
2- streamline the FHA approval process by expanding the number of lenders who can issue a DELRAP-approval
3- lengthen to approved time frame from the current 2 years (no definitive time)

It is our opinion that, because it was approved unanimously, it will get out of committee quickly and be sent to the Senate for a vote.  The Senate is less "conservative" than the House so a super majority of votes to approve the bill is expected.  President Obama has signaled that he will sign this into law.    It is our opinion that this bill will become law as soon as April 1, 2016.  This means that HUD could be approving condominium complexes, with less than 50% owner-occupancy, this Spring.

What does that mean to real estate professionals in San Diego?

It means that there will most likely be a flurry of FHA condominium submissions within two weeks of the bill becoming law.  We think it is a good idea to start the FHA-approval process with us now.  We can gather documents, prepare the package, and be ready to submit the day President Obama signs this into law, missing the expected onslaught of submissions.

Call me at 858-777-9751 with more questions.

 

 

 

Your agent is why your condo isn't selling

Jill was a good client of mine.  I funded an FHA loan for her when she bought her condo back in 2010.  She was sitting on $100,000 in profit in just five years.  Her original real estate agent left the business so she found an agent who advertised on Zillow  (Jill is pretty tech savvy).  She listed the property with this agent instead of calling me for advice.  The condo didn't sell, Jill called me to ask why, and I had to tell her the truth:

"Your agent was the reason why your condo didn't sell, Jill"

I told Jill of the tale of two real estate agents:  Barbara and Mike. 

Mike listed lots of properties...LOTS of them.  He was constantly on listing appointments, advertised those listings heavily online, and had things down to a "system".  His signs were all over her heighborhood and each listing was prominently displayed on his website;  he was a tech savvy property seller's dream agent...BUT...

Mike didn't know a darned thing about condos and condo loans.  Thus, Mike was always presenting offers which Jill had to decline because Mike assumed that, because the condo didn't have an FHA or VA approval, only cash or conventional offers would be funded.  Naturally, Jill was shown a lot of "low-ball, all cash" offers from investors and Mike told Jill "I guess the market has shifted".  Jill's $100,000 profit looked more like $50,000 when Mike was finished presenting the offers.  Naturally, Jill declined those offers and the listing eventually expired.

I had Jill speak with my friend Barbara, an agent who worked condo listings all over town.  Barbara spent a good bit of time with me after I funded a loan for one of her VA buyers (way back in 2009).  Since then, Barbara has done one thing...just one thing..which helped her take less listings but sell each and every condo listing she DID take, for full price.

Barbara insisted that the seller order the condo docs before it went into the MLS.

Barbara explained to her sellers that they would eventually have to order those condo docs when they were in escrow.  Unlike Mike, who "shotgunned" his listings approach by saying "don't pay for them before you have a contract",  Barbara explained that the couple of hundred bucks investment (in the condo docs), could add tens of thousands to the sales price, if the property qualified for FHA or VA financing.  Barbara would order those docs immedialtely and send them over to me.  I would take one look at them and say one of three things:

1- Barbara, I can get that complex both FHA and VA-approved
2- Barbara, I can get the complex VA-approved but you'll only be able to accept 20% down conventional, VA, or cash offers.
3- Barbara, that complex will only work for 20% down conventional loans and cash

Armed with that information, Barbara entered this into the marketing remarks on the MLS:

"Property may be eligible for VA or FHA financing.  Approvals pending through World Wide Credit Corp.  Call them at 858-777-9751 for cross approval"

Barbara explained to clients that that representation attracted twice as many buyers to her listings and justified charging a "premium" price--that meant more profit for her clients.  You know how the story ends...

Jill listed with Barbara, we ordered those HOA docs, and Jill sold the property to an FHA buyer...for a price which was much closer to what she wanted than the offers she received when Mike had the property listed.

Wanna be like Barbara?  Call me today at 858-777-9751.  We'll grab a cup of coffee and I'll break it all down for you.