Your Closing Costs Could Skyrocket in 2010

Last Friday the House of Representatives passed H.R. 4173 the Wall Street Reform and Consumer Protection Act of 2009. One of the facets of this bill that will be incredibly damaging is this--for every mortgage closed the lender or bank who closes the loan must set aside 5% of the loan amount into a Loss Reserve Account in hopes of reducing the amount of bad loans that are written by requiring each lender to have "skin in the game" as they say. The House is thinking that by doing this far fewer people will receive a bad loan and thus far fewer people will face foreclosure.

Sounds like a good idea, doesn't it?

Here is the problem--we as a mortgage lender or mortgage bank don't make anywhere near 5% on any loan. On average a mortage lender has gross revenue before expenses of about 2% of the loan amount; after expenses a mortgage lender is lucky to earn .50% of the loan amount as net income after expenses.

Here are the numbers on a $200,000 loan--

* Net income to the company is about $1,000 ($200,000 x .50%)

* With this bill we must set aside $10,000 ($200,000 x 5%)

How can we possibly set aside $10,000 for every loan we make IF we only truly earn $1,000 on that loan? The answer is: it's not possible! We would go bankrupt very quickly as we would run out of money. You can't spend $10,000 if you are only making $1,000. Unless you are the government.

Thus, I have calculated how much a borrower's origination fee would have to be for us to comply with this new rule if the Senate approves it as well and it is signed into law by the President.

* Not including taxes we would have to earn 7% on every loan that we close; which would typically mean you must pay a 6% origination fee or an additional $10,000 out of your pocket beyond what is today with a 1% origination fee.

* Including taxes (corporate tax rate is 35% plus state tax of 4.65%) means we must earn 11.60% on every loan we close to comply with this rule. This means you are now paying a whopping origination fee of 10.6%!!! On a $200,000 loan this is another $21,320 out of your pocket.

If you would like to pay this extra large sum of money to obtain a mortgage please write your House Representative and thank them. If not, please call and "curse" them. Or even better call our two Senators and tell them to not less this portion of the bill pass when this bill goes to the Senate in 2010.

3rd Highest Appreciation Rate in the Country

Zillow.com reported yesterday that Denver home prices have risen 5.2% this year through November which is good for third best in the country.

You might be thinking to yourself how? This is what I think is happening. Before 2006 very very few homes sold in Denver for under $100,000 in the previous 5 years. It was almost unheard of. Then, by 2007 and 2008 thousands of homes sold in Denver for under $100,000 and this dragged down our average and median prices of homes.

This year far fewer homes are selling for under $100,000, especially since March. Looking back it appears that February or March was the bottom of our real estate market in Denver. Demand for these homes far exceeds the supply of homes available and this causing prices to rise.

Now there are still hundreds of homes listed for sale for under $100,000; but a large majority of them are selling for over $100,000 as nearly every home priced this low will receive multiple offers. The home might be listed for sale at $90,000; but, don't be surprised if the winning offer or bid is $110,00 or even $120,000 or higher.

Both first time home buyers and investors are swarming to these properties. For example, I have a first time home buyer under contract on a HUD owned home appraised and listed for sale at $80,000 in NE Denver. In 2006 this home sold for $180,000 and she is buying it for $83,000. Since this house did not qualify for a traditional FHA loan due to it's inferior condition she was able to buy it for not too much more than the list price. I am helping her with a FHA Streamline Renovation loan to remodel the home into far better condition.

The FHA Streamline Renovation loan allows you to finance up to approximately $31,000 in improvements to the home. But, these loans are a lot of work for me and for you. Next, your out of pocket costs for these loans will dramatically increase January 1st 2010 as HUD believes it is better for you to pay more money at closing and to have a lower monthly payment than to have less money out of pocket at closing and a larger monthly payment. Unfortunately, you will no longer have that choice.

Denver Home Sales Surge 23%

It was reported today that Denver home sales increased an amazing 23% in November compared to November 2008 as nearly 3,600 homes sold last month.

Second, the median price also increased 11.8% year over year up to $218,000. This is a sign of more move up buyers buying new homes as the mix of homes that sold in November changed from being predominantly first time home buyers who typically buy homes priced under $200,000.

In fact, sales of homes priced over $1 million increased a whopping 30%, its first increase in almost 3 years as reported by the Denver Post.

Jeff Thredgold, an economist for Vectra Bank of Colorado said, "An increase of 23% versus a year ago suggests that confidence levels of potential buyers are higher."

Consumer Confidence is shaped by 3 primary factors: job stability and growth, real estate, and the stock market. Colorado does have one of the lowest unemployment rates in the country at under 7%. The stock market has increased over 40% since mid-March as well and maybe people are starting to feel a little more confident about our economy. Are you?

Consumers Lose Again

Last Friday FHA released a plethora of new Mortgagee Letters for FHA mortgage lenders like myself. These Letters spell out rule changes that go into effect in the near future. One of the Letters dealt with what are called Streamline Refinances where a FHA borrower can refinance quickly, easily, and cheaply into another FHA loan. It's been a HUGE benefit for decades for homeowners.

These were some of the benefits of a FHA Streamline Refinance Loan--
* No appraisal is required. If your home had dropped in value, it did NOT matter.
* No income or employment verification is required. Thus, you could be unemployed and
qualify for a new lower monthly payment.
* No credit check, except a mortgage payment review. Thus, you could be one day from
bankruptcy and that was ok.
* Lower closing costs for 2 reasons. First, there is no appraisal required and second, since
the loan required less work by me, I would charge fewer closing costs to my clients. I did
not have to make as much money on these loans because they were less work for me.
You Win!

But, come mid-November the Streamline Refinance program is going away. Here is how a FHA refinance will look like--
* A new appraisal is required if you want your new loan balance to increase to pay your
closing costs and prepaids. Who does NOT want that?
* We must verify that you are employed and receiving stable income.
* We must review your entire credit report.
* You can NOT refinance until you have made at least 6 payments on your new loan.

Beginning November 15th, refinancing your FHA loan will become more expensive and time consuming and less likely to happen. Plus, since I will have to work harder and longer to close your loan now, guess what? I am not so willing to help pay your closing costs now. Thus, YOU LOSE! You can thank our government in D.C. for that! You gotta love "change".

More Changes For FHA Loans Coming?

In order to keep FHA out of the red and maintain ample reserves I expect additional credit policy changes to come from FHA soon. Changes such as--

* Minimum credit score of 620-660--Currently, FHA has no minimum credit score requirement; but most lenders require at least a 620 fico score and some a 660 score. I expect FHA will set a minimum credit score requirement soon in the range of 620 to 660.
* We also might see FHA make changes on loans with gift money for the down payment. Currently, a family member or employer can provide gift money to the borrower. Possibly FHA might require that any borrower invest a certain amount of money or percentage of money into their home purchase or I could see FHA requiring a higher credit score on these loans.
* We might see FHA require first time home buyers to attend a class on homeownership.
* Maybe FHA will lower their debt to income ratio requirements. Currently on a manual underwritten loan FHA requires that your house payment not exceed 31% of your gross monthly income (housing ratio) or your total minimum monthly debt payments, including your house payment, to not exceed 43% of your gross montly income (total debt ratio). Currently, on a FHA loan underwritten on-line using FHA's Total Scorecard Underwriting Software will often approve loans with a total debt ratio of 51%. I expect this ratio will lower which means less buying power for you.
* Finally, I could see FHA raise the costs of borrowing by increasing the upfront Mortgage Insurance Premium and/or the Monthly Mortgage Insurance Premium; thus raising your monthly housing payments.

To take advantage of the more lenient FHA standards of today you need to act TODAY! Get pre-approved for a FHA loan with a FHA Expert and find your new home and write a contract as the rules are based on the date we order a FHA Case Number, which we can't order until you are under contract to buy a home.

Is FHA In Danger?

It is widely expected that FHA's cash reserves will fall below the level required by Congress on September 30th. There is now talk that FHA may need a bailout like Fannie and Freddie received last year.

In response to this FHA last Friday issued 6 new Mortgageee Letters which is their "rule book" for us as mortgage lenders. I have never seen them release 6 Mortgagee Letters in a week, not to mention in one day.

Some of the changes are good as they will soon be requiring all mortgage banks or lenders to have a $1 Million net worth to close and fund a FHA loan in their name. This rule does not apply to mortgage brokers as they don't close or fund any loans in their company's name.

FHA issued new rules on appraisals primarily on the independence of appraisers from mortgage professionals like myself. Effective January 1, 2010 FHA will not allow me to order a FHA appraisal with an appraiser of my choosing. What does this mean for you as a borrower?

* First, I WILL be forced to collect a check from you for the appraisal of $400 upfront and it will be non-refundable if we don't use it.
* Second, I can't ask an appraiser for "comps" or an idea of value for a home. For example, I did this last week for a first time home buyer as I thought the home he was under contract to buy was over-priced and my appraiser said I was correct. Beginning in 2010 "Tony" would be "out" $400 for a home that did not appraise at sales price and he could not buy. Wasted money down the drain. How's that for progress?
* Third, I expect it will take longer to receive a completed appraisal.

As you can see none of these consequences are good; but the people setting the rules don't care.

Later this week I will blog on the future of more possible changes from FHA so that they don't need a taxpayer funded bailout.

The Market HAS Shifted

In last Friday's Denver Business Journal was a great story about the sale of homes owned by banks or REO homes. Here are 4 AMAZING stats that you must know about--

· On REO homes they sold at a premium of 3% last month, meaning that they sold for on average 3% ABOVE list price.
· For REOs sold under $185,000, this premium increased to 10.7% and they sold in less than 5 days. WOW!
· Gary Bauer another analyst said that there is less than 3 DAYS supply of homes priced under $100k!
· Average sales price of the smallest homes (under 910 square feet) have increased 14% this year.

If you are just reading or watching the national news about real estate you are about to get a very rude awakening. The market for lower priced homes under $250k here in Denver is quickly recovering. The market has shifted in the last 6 months.

For example, from the 2nd statistic, a REO property listed for $165,000 sold for $182,655 on average in August! WOW!

What does this mean for you? If you are buying a home under $200,000 offering less than full price is foolish and a waste of your time. Second, if you need a down payment assistance loan, buying a home just got tougher because of their rules. Third, you must move quickly when finding a home. Fourth, act now and get pre-approved for your mortgage.

2 Critical Reminders on HUD Owned Homes

Possibly the most desireable homes right now are HUD owned homes as every buyer is hoping to get a great deal on one of their homes. Plus, owner occupying buyers who buy a HUD owned home with a new FHA loan can receive 2 great benefits--
* Only $100 down
* FHA will pay 3% of the sales price towards your closing costs

However, to receive these 2 GREAT benefits you MUST offer full price for the house! If the house is listed for sale at $150,000 and you offer $140,000 you will have to put 3.50% down on the house and pay your own closing costs!

My second reminder is if you win the bidding on a house and your final bid is above the home's appraised value (which is often it's list price) you will have to put more than $100 down! What the *#@?! Why?

Because HUD/FHA requires you to use that appraisal if the appraisal is less than 6 months old. We can't use a new appraisal. PERIOD!

So, if a house is listed by HUD for sale at $150,000 and it appraised at $150,000 and you win the bidding at $160,000, you now MUST put down an EXTRA $10,000 to buy this home as our loan amount is based on the LESSER of the sales price or appraised value. It sucks! But, it is true.

3 Buyers Wrote an Offer on the Same House

Some of the most sought after homes in Denver are bank owned homes and HUD owned homes. Why? Everyone is hoping to get a great deal and who can blame them. However, the great deals seem to be fading into history. Some great deals were available 6 months ago and many great deals were available in 2008 as I saw many of my clients take advantage of them.

Today is a different story. Last week I had two of my clients write an offer on the same HUD owned home in Lakewood and on Monday a new Realtor was referred to me by another Realtor and this agent had a client write an offer on this house too. I knew of 3 different buyers for this home. That is crazy!

Plus, it was not that great of a house in my opinion as it needed plumbing and roofing repairs and had lead based paint issues that needed to be resolved. The house appraised "as is" and was listed for sale at $156,000. It is under contract for $160,000!

To see this home for yourself, please click below
http://hud2.towerauction.net/cgi-bin/e7_select_sold.cgi

Many HUD owned homes are selling for above list price and "as is" value. This is even more true with bank owned homes as banks' strategy in selling their homes now appears to be: "list them low and create a bidding war". Their hope is that the bidding war will drive prices up and it appears to be working.

The moral of the story on bank owned and HUD owned homes: be prepared to bid full price and possibly more.

Cash for Clunkers

A HUGE majority of home buyers fail to realize that there is money available in a "Cash for Clunkers" program. One of my clients called me last week about this home for sale in Lakewood at 5959 W. Bayaud. Here is the link--http://www.littletonbankhomes.com/fine/real/estate/home_view/783314

This house is THE POSTER CHILD for the "Cash for Clunkers" program for homes. Take a look at this kitchen--WOW!

To say that the kitchen and bathroom in this house needs to be remodeled is a HUGE understatement and I have the money to help with a "Cash for Clunkers" Mortgage.

Here is how it works: FHA offers a special loan program to a select few lenders called the 203k Streamline Renovation Loan. With this loan FHA provides a home buyer with money to buy the home and remodel it at the same time. In fact, FHA is willing to provide you with up to $35,000 to improve the house with this loan. It's a great federally insured loan with a fixed interest rate that is safe and secure.

For more details on the "Cash for Clunkers" mortgage please email me or call me. Or post a question or comment here on my blog.

Reason #4 To Buy a Home in 2009

This reason only applies to eligible first time home buyers; but, you will be amazed at how many people qualify as a first time home buyer. Congress' definition of a first time home buyers is anyone who has NOT owned a primary residence in the last 3 years before your closing date on a new home. Thus, someone who owns a second home or a rental property could qualify as a first time home buyer!

If you last owned a primary residence, a home in which you lived in, more than 3 years ago you qualify for this credit!

If your parents or other family member own a home and they are co-signing with you to help you buy your first home you still get the $8,000 credit!

If your significant other has owned a home in the last 3 years and you have not, you can still claim the credit, all $8,000 of it, IF you buy a home BEFORE you get married, if a wedding is in your future. Sounds like a good way to help pay for your wedding!

But, don't miss out as this credit expires on November 30, 2009! You MUST CLOSE on your new home by this date! With only 3 months to go I would recommend against writing offers on "short sale" properties as they often take 3 to 5 months to close. Don't let this opportunity pass you by!

Green Shoots for Denver Real Estate

Yesterday, the highly publicized Case-Shiller Index for June and the second quarter was released. There was good news for the second month in a row for the 20 city national index and for Denver locally. For the Denver metro area Case-Shiller reported that our median home price rose 2.5% in the second quarter from the first quarter. On an annualized basis this would be a 10% annual increase!

Next, FHFA who oversees Fannie Mae and Freddie Mac, reported the following good news for the Denver metro area--
* 4th best results for the 25 largest cities with a median price increase of 1.24% in the second
quarter.
* 2nd best results for the 25 largest cities with a median price increase of .89% in the last
year.

Denver was one of only two large cities to report a median price increase in the last year. Why is this happening? I can think of four good reasons--
* Inventory levels are down and demand is up--Economics 101
* Interest rates are incredibly low.
* The $8,000 first time homebuyer tax credit
* Real estate investors are buying properties left and right, rehabbing the properties, and
reselling them for good profits, which is causing prices to rise in many hard hit
neighborhoods. This reminds of a survey I saw from 2007 that only 12% of first time home
buyers want to buy a "fixer upper", which leaves lots of inventory for investors to choose
from.

Reason #3 To Buy a Home Now

The last big foreclosure crisis in Colorado was in the late 1980's. And when you look at the numbers and statistics it appears that 1989 and 2009 are really similar. 1990 was the beginning of a slow recovery that really took off 3 or 4 years later. I believe 2010 could be the beginning of a recovery this time.

So, I went back and looked at 3 numbers from 1989 and here they are--
* Median home price--$92,000
* Median household income--$32,852
* Average 30 year fixed mortgage rate--10.32%

Since most housing affordability studies have always assumed 20% down, I will use that number in this calculation. Thus, for a loan at 80% loan to value with an interest rate of 10.32%, the P&I payment would have been $663 a month, which was equal to 24% of the median family's income.

Today, the median home price is $229,900 with a rate of 5.25% and the best median income figure I can find is the state-wide number from the U.S. Census Bureau for 2007 of $67,500. http://www.census.gov/hhes/www/income/statemedfaminc.html Honestly, Denver's median income is probably higher than this though.

Thus, if a buyer put 20% down on a median priced house as above, their P&I payment would be $1015, which is equal to just 18% of the median income. This means that homes today are approximately 25% more affordable than they were in 1989!

Why? Much lower interest rates. I have said for years that your mortgage rate has a bigger effect on your payment than the price.

So, why buy now? I am 98% sure that interest rates in 2010 will be higher as the Federal Reserve quits buying the majority of mortgage bonds issued by Fannie and Freddie in December. In fact, mortgage rates could easily rise by 1% or more next year because of this. Take advantage of these incredibly low interest rates and housing affordability that goes with it.

2 New Ways to Pay for College

Every fall millions of American families struggle with how to pay for college for their kids. This fall annual tuition for incoming freshman at CU Boulder ranges from $7,932 to as high as $11,782 depending on which school/major they will be in. WOW! On top of that, CU estimates that room and board, and other fees will total an additional $12,127. Total cost for first year of college is over $20,000 a year!

I graduated from college 18 years ago and tuition for my senior year was about $1500 and my room in a duplex was $120 a month. How times have changed!

I saw a statistic from Sallie Mae this week that said the average American family borrows 39% of the total cost for their kid's college expenses. WOW! That's about $8,000 a year they are borrowing for a grand total of $32,000 over 4 years.

Here are the traditional ways of borrowing to pay for college--student loans, student loans for the parents, and home equity loans. Unfortunately, many families don't have the equity in their homes they once had three to five years ago. Second, the ease of access to that equity is much more difficult today. For example, most banks won't do a home equity loan above 80% of their home's value. This third option may not be an option then.

Here's a fourth option for you. Buy a home or condo where your child(ren) will be attending college for the next few years. Your child(ren) will live in the home or condo and rent out the additional bedrooms to a friend or two or three and ask them to pay you rent instead of paying rent to the college. This will greatly reduce your monthly payment.

How much does it cost upfront? Here's the great news, FHA allows you to help a child buy a home even if they don't have a job and you just have to put 3.50% down! This also helps your child build a positive credit history with the best kind of debt possible--a mortgage.

Then, when your child(ren) are done with you can sell the home for a profit (hopefully) and use that money to repay any student loans you or your child have after graduation. Ta da! A new way to pay for college!

One final note--if your child has not owned a home in the last 3 years they will qualify for the $8,000 first time homebuyer tax credit even if you as the parents are on the loan and on title. But, they must close on a home by November 30th. Ta da! Another new way to pay for college!

Reason #2 Why Now Is The Time To Buy

Last Friday I blogged on the topic that the Denver real estate market may soon become a Seller's Market instead of a Buyer's Market. Why? Inventory is dropping especially on homes priced under $200,000 where inventory is under 3 months.

A second great reason to buy a home in 2009 is the exceptionally low mortgage rates we have this year. They are not as low as they were in the first 5 months of the year; but rates in the 5's are hard to complain about. My wife and I bought our first home in 2000 when rates were above 8%.

There have been 2 primary reasons why mortgage rates have been so low. First, is the recession we have been in. Normally, during every recession bond yields and mortgage rates drop as investors seek "safe haven" investments with a fixed return on their investment.

But, the second reason is more important as the Federal Reserve has taken never before seen actions to help our economy recover. One action has been the purchase of mortgage backed securities or mortgage bonds. They have purchased nearly $800 billion of mortgage bonds this year! Their plan is to purchase $1.25 trillion this year. This "temporary" demand has caused bond prices to rise and thus rates to fall. This "temporary" program ends in December.

A second action by the Fed has been their purchase of the Treasury's new debt issues such as 10 year T-bills and 30 year T-bonds. The Fed last week in their Meeting Minutes reminded the market that their purchase of the Treasury Securities will end in October with no plan to extend this "temporary" program.

Everything else being equal when the Fed quits buying the Treasury's new debt in November it is expected that Treasury yields will have to RISE to attract new buyers. Remember the Law of Supply and Demand? If supply stays the same and demand drops, what has to happen to prices? Just as with flat screen TVs, cars, and other consumer goods, prices MUST DROP. And with bonds when prices drop, RATES OR YIELDS RISE.

Thus, I expect in November mortgage rates will rise by 1/4% to 1/2% at that time. Come January, people smarter than me are estimating that mortgage rates will rise by 1% or more from today's super low rates. Ouch!

On a $200,000 home, your payment just increased by $123 a month if rates rise 1%! I will end with this maxim, "time is money". In this case taking your time could cost you a lot of money.

Are We Now In A Seller's Market?

In last week's report on the metro Denver area real estate revealed that housing inventory dropped to 4.7 months in July, its lowest reading in several years. For homes priced under $200,000, inventory is now under 3 months.

For decades a housing market in which inventory is under 6 months has been identified as a Seller's Market. So, is the Denver market now a Seller's Market? On some homes it definitely is as a majority of bank owned properties now sell for above listing price and as much 20% higher!

Why is this happening? Buyers are getting into bidding wars on these homes as the banks "artificially" price these homes too low on purpose. Also, inventory levels are really low. If you are trying to buy a home under $100,000 inventory levels are at about 2 weeks I hear!

So, what does a Seller's Market mean for home buyers and especially first time home buyers?

First, is more and more bidding wars on homes. In 2000 my wife and I were involved in two of these before being able to buy the 3rd home we wrote a contract on.

Second, home prices will rise as NAR's 2nd quarter report revealed on Wednesday. I remember in the late 90's when prices were rising 10% to 15% a year consistently that 99% of first time home buyers could not save money fast enough to keep up with the rising prices. For example, a couple might be able to save $500 a month or $6,000 a year; but home prices rose $20,000! They would go backwards by trying to save additional money.

Third and this is key for many first time home buyers, is fewer seller concessions to help with your closing costs. Two weeks ago I asked my most trusted appraiser whom I have worked with for 8 years about seller concessions. He told me he expects that seller concessions will diminish greatly in 2010 as sellers begin to realize that the market is NOW in their favor. This could mean that you need an extra $3,000-$5,000 to buy a home in 2010.

On Monday, I will cover 2 more reasons why 2009 may be the BEST YEAR EVER to buy a home in Denver.

How 47% of All Homes In Denver Were Purchased

I read this week on-line that in June 47.5% of all home purchases in Denver were with a FHA loan. WOW! I was astounded by this number. Three years ago I bet only 4-5% of all purchases were consummated with a FHA loan here in Denver. I definitely helped increase that percentage then.

You see when nearly every other mortgage professional was closing sub-prime loans I was closing FHA loans instead. In 11+ years I have only closed 6 sub-prime loans! Unless the borrower was already under contract on a home, I would instruct them on how to obtain a FHA loan whether it took 3 months or 3 years as I KNEW the sub-prime loans had trouble written all over them. I know I lost a lot of deals doing that in 2004-2006; but I had to do the right thing. Thankfully, by the grace of God I am still here doing the right thing.

For the last 2 years in my industry I have seen hundreds of offers, emails, and mailers about how to become a FHA Expert as if they were some brand new loan. Each time I receive an offer to become a FHA Expert I quietly think to myself, “I already am a FHA expert, I could teach that class or seminar in my sleep.” You see FHA loans have been around for decades and they are great loans and I have closed hundreds of them.

Who are you going to trust with your FHA loan? Someone, who thinks they are a new type of loan and who is still “cutting his or her teeth” on them? Or someone who has closed hundreds of them for 11+ years?

Denver Home Prices UP 16%

The National Association of Realtors or NAR reported 2nd quarter statistics for over 100 metro areas today. Nationally, the median home price increased 4% in the 2nd quarter from the first quarter. The national median home price as of June 30th was $174,100, which is down 15.6% from June 2008.

NAR also reported that 36% of all home sales nationally in the 2nd quarter were distressed sales. What's a distressed sale? It's the sale of a property by a bank or a seller who owes more than the house is worth; otherwise known as a short sale. On average distressed properties sell for about 15% less than a privately sold home which drags down the median price from above.

For Denver our median price increased a whopping 16% in the 2nd quarter from the first quarter as our median price increased by over $30,000 to $223,700!!! That is a HUGE increase. It even surprised me by the size of the increase.

More and more reports are pinpointing the bottom of our real estate market to have been March 2009. The vaunted and highly publicized Case-Shiller Index also points to a bottom in March.

Remember the saying "buy low, sell high"? NOW is the time to buy.

It's Better To Have and Not Need, Then To Need and Not Have

Yesterday we learned that banks truly have the safety and peace of mind we crave when we have lots of equity in our homes or we make larger than necessary down payments. So, how can we turn the tables on the banks and regain safety and peace of mind for US?

Here’s the secret—Liquidity. Liquidity is a fancy economic term for money in the bank. Thousands of companies have gone out of business, not because they are not profitable; but because they ran out of money. For instance, in June 2007 First Magnus was named one of the 20 largest wholesale and correspondent mortgage lenders in the country and rated a best buy by many stock analysts because of their increasing market share and profit margin. By the end of July they were out of business! Why? They ran out of money and did so in about 2 weeks after Countrywide pulled the plug on them.

CASH IS KING! Money talks! Money in the bank is a wonderful thing for a business and for an individual or a family.

Let’s assume you were buying a $200,000 home and you had $22,000 in the bank. Should you put 10% down or $20,000? Or should you put down $7,000 or 3.50%? Traditional wisdom tells us to put 10% down so that you feel safer; but we learned yesterday that our feelings can betray us.

What’s the safer choice?

It comes back to liquidity and money in the bank. I would recommend that you only put 3.50% down or $7,000, as that will leave you with $15,000 in the bank after closing. And every financial advisor will tell you to keep at least 3 to 6 months of living expenses saved in the bank and maybe even more right now.

You see your home is safer when your money is parked OUTSIDE of your home in the bank where you can get to it easily when needed. Whereas, your home is more at risk with a larger down payment, as that large down payment parks your money INSIDE your home where it is very tough to get at when needed.

Remember the adage: “It’s better to have and not need, then to need and not have”? This is the principle I am talking about. It’s better to keep your money in the bank and have access to it (liquidity) and not need it then to have your money in the house and need it and not have access to it. Because, when do you really really NEED peace of mind? When catastrophe or trouble strikes. Will you be prepared?

What's the Safer Loan?

I recently have had 2 clients trying to decide between putting the smallest down payment possible on a house or putting extra money down on that house for safety and peace of mind. Currently, the smallest down payment possible is 3.50% for a FHA loan unless you are a veteran and qualify for a Veterans loan with no money down.

I want to deal with the emotional question which loan is safer: a loan with 10% or more down or a loan with 3.50% down? If we were to poll Americans on this exact question, I would bet that 90% of Americans would say the loan with 10% or more down is safer. And I would say you are “correct”.

But, “for whom”? Let me tell you a story one of my clients told me a couple years ago. One of her parents’ neighbors had owned his home for 27 years and had been paying on his mortgage for 27 years. He was just 3 years from paying off his house in full. Then, catastrophe struck and he no longer had any income to make any more mortgage payments. He had lots and lots of equity in his home; but because he had no job and no income he could not get a new mortgage or line of credit to make the house payment with. And thus he LOST his home to foreclosure and he lost over $300,000 in equity!

I bet before his catastrophe struck that he felt “very safe” because he had a lot of equity in his house. It made him feel safe. But, what he did discover through the School of Hard Knocks? That your home’s equity is NEVER SAFE or guaranteed until the house is completely paid off.

Who truly WAS safe after 27 years of payments by the borrower? The BANK! The BANK had the safety and peace of mind, not Mr. Homeowner.

The same principle applies when we choose to make a larger down payment than needed to buy a home. We “feel” like our home and our loan is safer; but, it is NOT! It’s safer for the bank, not us as they have more certainty of getting their money back as they already have more of our money.

So, what’s the safer loan? I will discuss that tomorrow along with the fact that most borrowers are confusing safety with liquidity.

What Passes For An Appraisal Today

As I wrote about yesterday the new Home Valuation Code of Conduct or HVCC is wrecking havoc on thousands of buyers and sellers of real estate in its first two months. According to a recent survey by NAR 37% of their agent members had already experienced a lost sale due to this new rule in just the first two months of this rule. Today, I want to cover two things: first, what passes for an appraisal today and second how to protect yourself.

I was talking with my best appraiser Jim Boehm this week about the HVCC and its effects. I have worked with Jim for 8 years and he is a great and honest appraiser.

Jim said he and The Appraisal Institute is hearing stories of what passes for an appraisal at many large Appraisal Management Companies with the BIG banks.

*The appraiser never visits or sees the home; instead some other lower paid employee visits the home and takes pictures.
*The information about the lot is pulled from county records, MLS data, Google Maps, etc.
*The appraiser may pull more pictures of the home from the MLS.
*The sketch diagram of the interior of the home is pulled from county records if available; if not available, apparently the sketch diagram is "created".

*Appraisers are often located many miles away from the property and have no familiarity with the neighborhood.

You may be asking yourself, "why is this happening?" First, let me tell you from personal experiences BANKS ARE CHEAP! They are always looking for ways to save money. Because of their cheapness BIG banks are having a very difficult time hiring appraisers. The BIG bank may charge you $450 for the appraisal; but they only pay the appraiser $175. Thus, they get lousy; but, cheap appraisals.

Word for the Wise—Don't choose a BIG bank as your lender either at your local branch or from mortgage brokers who use wholesale lenders. Your home, your dreams, your sanity, are at stake!

Personally, I refuse to use any of my wholesale lenders on conventional loans because I don't know what I am going to get from the appraiser. Normally, I almost always close loans as a Banker in our company's name which gives me more control. I don't get to choose the appraiser anymore; but I know as a company we did a great job of choosing our roster of 25 highly experienced and competent appraisers to minimize problems and issues for you.

How 37% Of All Home Sales Did Not Close

The National Association of Realtors recently surveyed their members about the effects of the Home Valuation Code of Conduct or HVCC on their business in the first two months of this new rule. The HVCC eliminates the ability of the mortgage professional from ordering your appraisal with a professional appraiser that he or she knows and trusts to do good work.

This new rule came about after NY Attorney General Andrew Cuomo sued WAMA and its Appraisal Management Company or AMC that it owned for negligent and inflated appraisals in the state of New York. Mr. Cuomo then went after Fannie Mae and Freddie Mac too for not protecting borrowers and the public from this problem. Let's be clear about the problem, the problem was inflated appraisals created by the Appraisal Management Company or AMC that WAMU owned.

Mr. Cuomo's solution to this problem is to require every bank and mortgage lender in the country to form a AMC of their own or create a separate department within their firm to handle the appraisal process.

Mr. Cuomo did what ONLY a politician could do--solve a problem wherein the solution to the problem is the very thing that caused the problem! See the irony? The problem was the AMC which was owned by the bank, now every bank and lender is required to use an AMC which may be owned by them. This is like telling a drunk we are going to get you to quit drinking, by having you drink MORE. It's a stupid idea that only a politician could fathom. To make matters worse the AMCs are NOT regulated either whereas the bank or lender is.

After this background information on the HVCC, here are the results of the NAR Survey--

* 37% of their members have already lost a sale due to an appraisal that came in below sales

price. This was just in 2 months!

* A majority of Realtors reported that the appraisers were out of the area and not familiar

with the neighborhood.

* The appraisers did not use true comparables for their sales data because they were not

familiar with the area; thus the appraisals came in low.

You may be thinking "big deal". Here's why it is a big deal--each of those Realtors represent a buyer or a seller in the sale of a home. 37% of all homes where the buyer chose a conventional loan, the deal fell apart and did not close. Dreams shattered! Moves cancelled! Families split apart! This is shocking news!

So, how do you keep it from happening to you? I will write about that tomorrow along with a story of what now passes for an appraisal with the big banks and their AMCs. You won't want to miss my next post.

Denver Soon To Be a Seller's Market?

The widely publicized Case-Shiller Index was published yesterday with sales results from May. Nationally, the 20 city index showed its first monthly increase in nearly 3 years as the average home price rose by .50%. Here in Denver the average home price increased 1.3% from April, more than double the increase nationally. For the last year the Denver market is the second best performing market in the country with an annual decline of just 4.6%.

Jeff Thredgold, economist for Vectra Bank Colorado noted that our economy is transitioning from recession to growth currently, which is a very good sign.

"With less than a three-month supply of homes priced lower than $200,000, it's not surprising Denver is showing the second-smallest decrease in year-over-year pricing," said Lon Welsh, managing broker of Your Castle Real Estate. By the way, Your Castle Real Estate has the best statistics and reports on our local real estate market.

The market for homes under $200,000 is quickly changing into a Seller's Market with this low amount of inventory available. We may have forgotten what a Seller's Market is here in Denver. Let me remind you, when my wife and I bought our first home in 2000 during the last Seller's Market we got into bidding wars on the first 2 homes we wrote contracts on and lost them. We were able to buy the 3rd one without a bidding war because we found the home listed in the paper, not the MLS in its first weekend on the market.

I also remember advising all my first time home buyers then to buy a home as soon as possible as prices were rising 10-15% a year. Why? They could not save enough money fast enough to keep pace with the rising prices of homes. For example, you wanted to buy a $150,000 home and you wanted to wait a year to save more money which can be a wise decision. However, back then in another year that home would be priced at $170,000 and unless you could save $20,000 in a year you were going backwards. A final reminder from that Seller's Market, interest rates were above 8% that summer!

Is Homeownership Still A Good Idea?

Many pundits in the national media have begun to write off owning a home as a wise financial move for Americans. In fact, some people now believe that renting is a better long-term strategy. Let's look at two statistics--

• HUD or Housing and Urban Development reports that the average rent payment increase is 5.31% a year at a national level over the last 30 years.
• In Denver the average home price has increased 6.4% a year since 1971 according to MLS data from Your Castle Real Estate.

Currently, the median Denver home price is about $238,000. The average 2 bedroom 2 bath apartment rents for $1,056 a month as of the fourth quarter of 2008 (Source: Dr. Gordon Von Stroh at the University of Denver).

Thus, in 10 years the average 2 bedroom 2 bath apartment in Denver will probably rent for about $1,771 and the median home price could be $442,581 an increase of over $200,000! Even if prices rise just 4% a year, the median home price would be $352,000 in 2019. As a renter you are subject to rising rents on an annual basis; whereas, if you own a home and have a fixed rate mortgage and your monthly mortgage payment does not change!

Plus, as a homeowner you have the possibility of future appreciation, tax benefits, pride and joy of homeownership. A recent survey by the National Association of Realtors revealed that 83% of Americans still believe that homeownership is a good financial decision. Do you agree?

Denver Home Prices on the Rise

Here is the most recent data on Denver real estate from The Denver Post--

• In June the number of homes sold increased 15.4% from May.
• The median price increased 8% in June to $237,500 from May.
• The median price in June was 3.3% higher than it was in June 2008.
• Housing inventory remained steady at 20,853 homes which is down 20% from a year ago.
• Inventory in June is now at 4.98 months.

It appears the Denver housing market is beginning its long road to recovery as a bottom was reached earlier this year. Our market for the last few years was a Buyer's Market; but that could be changing soon depnding on your price range.

Normally 6 months of inventory is considered a stable market in which neither the buyer or the seller have an advantage. Nationally, nearly 10 months of inventory exist, putting buyers in the driver's seat. Here in Denver there is now less than 5 months of inventory available which is usually a sign of a Seller's Market and higher prices soon to come.

For homes priced under $100,000 there is almost no inventory available today as the supply is under 1 month. For homes priced under $200,000 inventory is under 3 months and sellers are receiving mulitple offers on their homes. Thankfully, these sellers are still willing to help pay the closing costs of buyers; but I expect this will change in the next year. Thus, this is another reason to act now!