Mortgage Financing Blog

From the Wall Street Journal

A nationwide glut of new condominiums has prompted developers to use new marketing ploys to sell their units. One increasingly popular move: get a government stamp of approval for the entire building.
From the Wall Street Journal

The approval, from the Federal Housing Administration, means potential buyers can more easily qualify for a low-down-payment mortgage backed by the FHA — a highly coveted amenity in this era of tight credit.

Condo developers are able to sell units at better prices to FHA-approved buyers than they would in all-cash sales to investors, sometimes with premiums as high as 20% to first-time buyers with FHA financing, says Grant Stern, president of Morningside Mortgage Corp. in Bay Harbor Islands, Fla.

“First-time buyers are more focused on the down payment and the monthly payment than the total cost,” he says.

As posted in the Miami Herald article called “Mortgage Rates Rise”:

”It’s going go start to put a damper on the activity but not a whole lot,” said Grant Stern, president of Morningside Mortgage in Bay Harbor Islands. “Fortunately, prices have been steadily dropping off for a long time at this point and a lot of people are still well within the range of buying property with a loan they can afford.” ”

“It’s definitely going to dampen refinancing activity, though,” Stern said.

As you can plainly tell, higher rates are Not good for continued economic recovery, but the market forces that have created them are good for the overall health of the market.  The higher long term interest rates on bechmark Treasuries are still very low by historic standards.   This interim rise in the rates should encourage fence sitters to jump into the market as buyers and that’s the real key.

Obviously, it will be a big help to the market to allow those whose interest rates are in the 6-7 ranges to refinance at better terms.  Certainly, not everyone who can take advantage of better rates, has been able to refinance already, but many of them have done so.  However, the real estate market’s problem is primarily oversupply.  Lower prices are going to trump lower interest rates in this market, since the capital cost is usually more important for the type of investors and first time buyers which the market is counting on to soak up these extra homes.

My realtors are telling me stories about bidding wars on bank REOs (real estate owned, the bankers term for repo’d houses).  Short sales are still dragging on endlessly while banks take their time to make sales decisions, but once a property is bank owned, they are agressively cutting prices to sell.  The percieved value of these properties is now higher than the market prices - and rightly so since many are selling for below the cost of building, even for new construction.

Now, if we were to see another run up of interest rates equivalent to the last 2 week’s run up, in the coming month, it would put the lid on the activity we’re seeing.  I am betting that we will see some small form of market intervention by the Federal Reserve to use their already stated policy of buying both Mortgage Securities and T-Bills to prop up the prices (and lower the yield) of the 10 year T-Bill and provide for just 1 more 2-3 month period of artificially lower rates in the next 6 months at a time when it is psychologically appropriate.

“I have waited a lifetime
Spent my time so foolishly
But now that Ive found you
Together we’ll make history”

Open up the door, wont you open up the door?” - Foreigner - Feels like the first time

Nothing says generational change like the wave of first time home-buyers rifling through the nation’s bulging new and used home inventories looking for bargains. While baby boomers were still more likely to marry in their early 20s and move to the (still cheap) suburbs, Gen X and Y buyers are just starting to settle down in their late 20s and early 30s, just in time to take advantage of the bottom of the busted prices for homes.

Many of them have been patiently waiting, paying oversized rents all of these years and are looking to take advantage of the (ubiquitously advertised) $8,000 federal income tax credit.  Just today, the FHA announced that borrowers who are eligible for the credit, who are using FHA loans, may apply the credit money up front, towards their closing costs, or to make additional down payments.  Many renters delayed families rather than accept option arms, and for those who spent the days of dumb money saving as much of it as they can, this strategy is paying off in spades!   These winners in the game of real estate roulette truly did triumph by standing on the sidelines. . .

The best and brightest new buyers are reaching out to trusted real estate professionals who are their age for referrals and advice.  They are internet saavy and using sites like Trulia.com, Realtor.com, Zillow.com and of course CondoVultures.com to study the market and seek information, advice and listings.   Most first time buyers begin shopping without trusted professional help and some run into the pitfalls associated with unscrupulous sales people, such as transaction brokers representing themselves while collecting double commissions or showings of homes.

I have seen buyers channeled to homes with illegal units or rooms in this scenario.  Also, the agent representing both sides of a transaction has little incentive to obtain the lowest price for a buyer, many times claiming to have multiple offers which may or may not exist, while also possibly being able to refuse to present offers to the seller.

I recommend that all first time buyers request from the Real Estate professional that they represent your interests as a Single Agent and to provide a written Single Agent Notice for your records.   This simple, 1 page notice engages the Real Estate agent’s services with not only exclusive representation, but also loyalty, confidentiality and obedience.  If an agent refuses to act as a Single Agent, it’s a pretty good sign that they’re not committed to working for your benefit.

The next choice is not only how much home to buy, but what can you afford within the overall budget between down payment and the cost of repairs or improvements.  The Miami-Dade County new construction market consists primarily of condominium units, many single family homes are therefore already existing, or have been rentals and/or foreclosures before hitting the market right now.  Most single family home first timers are looking to get as much house for their buck as possible, in the best location possible.  However, this raises the question of paying a higher price for move-in ready property, or a bargain basement price for distressed property.  Properties with medium to high end finishes are still selling for a far higher fair market value than older existing homes with original appliances or the numerous homes where major fittings and appliances have been removed in the course of foreclosure or distress.

The concept of a starter house is an excellent idea for today’s new buyers, because they are getting the best prices at the low point in the economic cycle.  I call this type of house hunt a “Value Buy”  Real estate appreciation is something that happens more on a market level, rather than because of the improvement of any one house in a neighborhood.  Typically, the people who spend a small fortune on improvements stay in their homes, while neighbors who spend less, move more often, but it’s those homes which set the market price.

Often times, the price of renovations is under-calculated at the outset, then the emotional decision to invest into a home kicks in, and homeowners plug thousands, though more often tens of thousands of dollars into improvements.  In a normal market, improvements can be directly factored into home values, but after the period of excess, we’re in a period of deficit.  Sadly, I’ve seen even experienced investors purchase property at distressed prices, shove low 6 figure sums into the property and re-appraise below purchase price!   I personally recommend that first time buyers should look for homes that are move-in ready, that have upgrades or are otherwise whole and complete.   How often do first time buyers take this advice, rarely.

Right now, it would be greatly to the advantage of first time buyers to take advantage of still low interest rates and make financially wise “Value Buy”.   Remember to seek professional referrals from trusted sources to eliminate the simple traps in real estate sales.  Request a Single Agent Notice from your realtor before you start shopping   Look first at existing homes with move-in ready rooms waiting for inexpensive paint and molding improvements.   Following these few simple tips can make your first time home buy into a first timer’s home run!

As seen in Bloomberg News

A good-credit borrower who could have gotten a 4.625- percent 30-year mortgage on May 22 and a 4.875-percent loan yesterday will probably be offered a rate of 5.25 percent tomorrow, according to Grant Stern, the owner of Morningside Mortgage Corp., a brokerage in Miami Beach, Florida. Today, one lender he works with increased its pricing four times, he said.

“The last two months have been quite abnormal” as mortgage rates generally held in a range between 4.5 percent and 4.75 percent even while Treasury yields began climbing, he said.

Back in January, a client of mine remarked that he wished the rates would go down.  I told him that I hoped rates would go up and spreads would go down.  

Simply put, the benchmark interest rates for lending are the rates which investors demand to lend money, virtually risk free, to the US Treasury (who in 233 years has never defaulted).  An interest rate “spread” is simply the difference between the benchmark and a rate which is compared to the benchmark, “spreads” are expressed in absolute percentage terms or bps (basis points 1 = 0.01%).  

When the market was in a panic, investors rushed to lend money to the government at generously low interest rates, but demanded giant premiums to purchase Agency Mortgage Backed Securities (MBS) which are considered only slightly more risky than T-Bills.  

Fortunately for the market, this has played out in the last months, but created a strange dynamic where mortgage rates stayed fairly rangebound, while the cost of government debt continuously rose.  This means that the “spreads” or risk premiums that investors demanded have been reduced, and is yet another “green shoot” in the budding spring of our economic recovery.

‘Drag Me to Hell’ Turns Home Lending Into Horror Show (Update1) - Bloomberg.com.

Yes, it is my solemn duty to defend my profession from Hollywood

The Cannes Film Festival hosts a midnight screening of “Drag Me to Hell” this month amid public rage at home lenders that led to U.S. hearings about their role in the housing collapse. The industry opposed letting bankruptcy courts modify mortgages to help about 1 million Americans keep their homes. Foreclosure filings set a record in April, according to RealtyTrac Inc.

“How did it get this far?” said Grant Stern, mortgage broker and president of Morningside Mortgage Corp. in Bay Harbor Islands, Florida, who was laughing as he viewed the movie trailer online. “We’re not that bad.”

Miami’s vertical homebuilders are slowly waking up to the reality that the Government backed mortgage loan will be the only way to sell off bloated inventories of condos. The FHA mortgage is the clear choice of new home buyers and represents the only legitimate option for vertical homebuilders to reduce their inventories organically through sales to end users. One of the primary reasons that new homes are disproportionately represented in the FHA insurance pool is the low down payment feature. The Florida market for condominium and attached housing is currently under the interdict of all private Mortgage Insurance companies. Market share statistics show a new perspective on the rate of growth in FHA lending and it’s necessity for home builders. The FHA Condo approval process has high standards and involves a thorough and arcane review of all aspects of the communities’ legal documents, fiscal practices and on-site inspections.

The highly successful Government insured FHA mortgage program was introduced in 1934 (click here for the complete history) and created the 30 year fixed mortgage. Private lenders issue loans endorsed by the FHA to participate in their national Mortgage Insurance Program (MIP). The loans themselves are made with private money, and the insurance policy is equal to 50% of the face value of the loan.

The FHA loan is crucial for first time home buyers, who can qualify for the monthly payments, but have anywhere from 3-10% to put down on their purchases. A 3-5% down payment is typically near or equivalent to 3 months rent in a normal market, which would be a first, last and security deposit.

Banks require Mortgage Insurance to make loans for greater than 80% of the value of the mortgaged property. (Note: PMI Group is only one of the companies, other providers are UIG, MGIC, Radian, RMIC and Genworth). Without this crucial insurance, banks cannot hedge their risks effectively and resist giving out the loans first time homebuyers need to purchase real estate.

The requirements for a buyer obtain mortgage insurance in Florida, on a single family home, buyers must have 10% down payment and a 720 or higher middle fico score. The FHA does not have a minimum score requirement (though lenders typically want borrowers with scores above 620) and will issue loans with as little as 3.5% down payment. Since 1980, the FHA’s Mortgage Insurance Program has insured up to 58% of all insured loans in the marketplace and at the rate we are going, may top that figure Very Shortly.

Across America, people are searching high and low for financing, nowhere more so than in the South Florida new construction condominium market. Mortgage lenders across the state are rummaging through the back corners of their closets and pulling out dusty pet rocks, disco boots and HUD’s ubiquitous handbooks for FHA lending.

The FHA’s mortgage market share of all loans originated in 2007 was just over 4% and slightly less than 6% of all new homes. Per current figures on HUD.gov, the FHA loan program now has a share of 16.6% of the total market and a whopping 22.78% of new construction! FHA’s share of mortgage loan origination volume has jumped more than 400% in only 2 years!

The FHA process itself is arcane and poorly documented. My firm does assist developers and communities in applying for certification through FHA Condo approval process. By our most recent count, there are 26 steps in the process just to assemble an application for HUD, if the condo has absolutely everything in perfect order.

Typically, there’s a lead time of 30-90 days of preparatory time to amend budgets, condo docs, ensure full compliance with state law and governance issues. The approval process takes anywhere from 30-90 days depending on HUD’s review volume and (inevitable) complaints about specific items in the project’s operations.

In a market like ours, the only surprise is how slowly developers have been reacting to the news that there is a steady source of financing available for their projects. Without a doubt developers stand to benefit greatly from gaining the FHA approval on their vertical projects.

Buyers stymied by tough rules on condos - Business - MiamiHerald.com.

Complex federal rules that make it extremely tough for buyers to qualify for loans in many South Florida projects, unless they pony up steep down payments.

Those rules, recently made even more rigid, could undermine any recovery in the region’s depressed condo market — and drive unit prices even lower — just as demand seems to be on the upswing.

”There is this tide of demand out there,” said Grant Stern, a Bay Harbor Island mortgage consultant. “But the access to capital has been stalled on thousands upon thousands of units at a time when all of the real-estate market is extremely fragile.”

This is a new column I will be writing weekly for CondoVultures.com, a news and information website by Peter Zalewski.  His company is the premier market research company for the South Florida condo market and represents bulk buyers, as well as having a real estate brokerage of the same name, whose agents represent buyers looking for the lowest priced condos.

Broken Condominiums-CondoVultures.com

Excerpt: 

My recommendation for value investors who want maximum profits for minimum input is to engage in the practice of Condominium Termination. 

In several high rise towers, residents have reported the interruption of cable and internet services, rampant squatting, thefts and other misadventures related to non-payment of association dues in the property and lack of proper security.  

Residents of the Mirrasou condominium in Northwest Miami-Dade lost access to the most basic of utilities, drinking water, as reported by the Miami Herald on April 16th, 2009.  According to the report, the association has a delinquent bill of over $124,000. In the end, it took the direct intervention of a city commissioner to get the water flowing to this 304-unit condominium development. 

When the water is shut off in a multifamily building, residents have to watch out for hazards such as infection from unsanitary relief, dry traps in sinks and toilets that create stenches, and the possibility of sudden condemnation of premises leading to emergency evacuations of owners and tenants alike.  

During the peak of the great housing boom, dozens if not hundreds of developers hurled themselves into apartment house to condominium conversion projects. These groups operated like miniature private equity hedge funds, buying what were then mispriced commercial real estate assets and converting them for residential use and sale to individual owners. 

The dollars and sense of these projects seemed obvious at the time, with condominium prices crossing $300 per square foot for even the lowliest of dwelling houses. And appetites seemed never ending.

Buyers lined up for the opportunity to buy a corner unit because it had much better value than an interior unit. These speculators, for the most part, have been removed from the scene, banks are taking huge losses - often times as a direct result of ignoring their own rules for occupancy and use in lending - and buildings that sold substantial amounts of units have become “fractured”.

Yes, this is my quote for the year.  Thank you Bloomberg News for noting that I say these days which is “I own a mortgage company, And I’m still in business”  Lol.

 It’s an odd feeling personally.  I got into the business at a time when you could go to a party and rub elbows with nothing but other mortgage brokers, lenders and bankers.   Nowadays, when I tell someone that I’m still in the business, they have a look of disbelief.

Fannie Mae has launched a website called HomePath to sell off it’s book of  real estate owned (REO).  In addition, they have rolled out a new loan program with the same name to facilitate faster sales of these REO properties.  My company, Morningside Mortgage is eligible to issue loans for these properties through Flagstar Bank.

In what may become a model for other lenders who have foreclosed properties to sell, the Fannie Mae HomePath program has the following features to speed absorption of their properties back into the market:

• No appraisal required - Purchase price is used as the appraised value.  
• 5% down payments - no mortgage insurance required (this is especially a big deal in Florida as there is none available for Condos)
• Available for qualified first time homebuyers AND investors
• All levels of credit are accepted
• Buyer may have up to 10 financed properties

Personally, I just think it’s a shame they took this long to come up with this type of program in the current environment.  Perhaps they will also allow banks to start selling some of their REOs and sell them to Fannie Mae to facilitate moving more REO off the books and back into homeowner hands?