Mortgage Insider

Reader with cash weighs home buying options

Mathew Padilla — Fri, 20 Nov 2009 09:00:49 +0000

Randy Johnson, president of Independence Mortgage Co. in Newport Beach, author of “How to Save Thousands of Dollars on Your Home Mortgage” and a mortgage broker since 1983, answers questions…

Q. I own a house with $400,000 left on my mortgage at 5%. Similar houses nearby are worth between $470,000 and $530,000. Through selling of my employer’s stock options, savings and other investments, I have about $500,000 sitting in money market accounts and CDs, earning very low interest. I would like to take the downturn as an opportunity to move up to a bigger house and keep my current one as a rental. My question is which way to go: one mortgage vs. two mortgages? Should I pay off my current mortgage and borrow for the new house? Or should I leave the remaining mortgage balance untouched and pay as much as possible towards the new house purchase? My job is in good shape. I have excellent credit, no debt other than the mortgage on my current home. I heard with my income level, the tax benefit from mortgage interest will be very limited or completely phased out in the next year or two.

A. For most people Fannie Mae and Freddie Mac have a rule that says you must have at least 30% equity in your home if you plan on keeping it as a rental. There have been too many instances where someone “says” that he is going to rent it out, but when there is no equity, as soon as he has the new home, he lets the old one go. This rule does NOT apply if you have enough income to qualify for both the current loan and the loan on the new property.

If you can’t do that, you could pay down the current mortgage to 70% of the appraised value and that would still leave you with plenty of money for a down payment on a new home.

So far as the tax law is concerned, I have been hearing that for more than 40 years. The only thing that has happened is that the IRS limits interest deductions to mortgage amounts of less than $1,000,000 plus $100,000 equity line. I think this has been a sacred cow but Congress is going to have to figure out how to raise revenue and at some point the deduction may be further limited.

Judy in Anaheim Hills:
Q. Is it best to go directly to the bank that holds your mortgage if you want to get it re-evaluated for a refinance? The loan payments are in good standing, but it was purchased high! There are all kinds of ads/promotions stating they can help and appear to be legit; how do I analyze which is the right way to go?

A. It has not been my experience that going back to your current “lender” has any advantages, but I would include them on your call list, especially if you have a jumbo loan. Most lenders are really “servicers” who collect your payments and manage the loan for the actual owner. A majority of loans in this country are owned by Fannie Mae or Freddie Mac and with a couple of exceptions any lender you choose can offer the same options as any other. However, and this is critically important, you ought to choose someone who is really talented to help you explore those options. All too often the people who answer the phones at many lenders are poorly paid, inexperienced people who cannot offer you accurate or helpful advice.

That’s it. If you want Johnson to answer a question, email it to Mathew Padilla at mapadilla(at)ocregister.com. Include your name or nickname and the city you live in — that information will be published with your question. Johnson will answer up to three questions each week, so keep checking back for a response.

Read prior questions and answers by clicking on the headlines below…

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These homes are about to be foreclosed

Marilyn Kalfus, real estate reporter — Thu, 19 Nov 2009 20:00:23 +0000

First, in foreclosure news this week:

Banks start foreclosure on 2,100 mortgages

Every week, homes throughout Orange County go to foreclosure auctions. The owners can be millions of dollars in debt, or owe just a few thousand.

Often these homes revert to the lenders, who eventually put them back on the market. Sometimes the homes are bought by investors and resold.

Foreclosures affect more than the homeowners involved. They can impact entire neighborhoods. At the very least, they can affect nearby home sales.

All of these homes and addresses have been listed in the public notices, as required by law.

See Aliso Viejo HERE.

See Coto de Caza HERE.

Huntington Beach HERE.

See Irvine HERE.

See Laguna Niguel HERE.

See Laguna Woods HERE.

NEW! See Orange foreclosures HERE.

San Clemente HERE.

See Yorba Linda HERE.

To read about how these auctions work, CLICK HERE.

Trustee, trustor … what’s the difference? To see foreclosure terms and definitions CLICK HERE.

Top tips for buying investment properties CLICK HERE.

Note: There are foreclosures in other Orange County cities but so far we haven’t had enough available writers to regularly compile foreclosure information from them. We hope to add more cities in the future.

For a map with a partial list of other real estate listings around Orange County, click here

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Republicans want hearings on FHA

Mathew Padilla — Thu, 19 Nov 2009 15:20:35 +0000

Republicans on the House Financial Services Committee are calling for hearings on the financial health of the Federal Housing Administration’s reserve fund, which recently reported a drop in its capital ratio to 0.57%, well below the amount required by Congress. Here’s more from National Mortgage News:

Citing FHA’s deteriorating financial position, Reps. Spencer Bachus (Ala.) and Shelley Capito (W. Va.) are urging committee chairman Barney Frank, D-Mass., to schedule a hearing as soon as possible. “If home prices do not recover, the economic value of the Mutual Mortgage Insurance Fund could fall below zero. We are concerned that such a drop could force HUD to request an appropriation from Congress,” the two Republican lawmakers say in a letter. FHA officials maintain that they have taken corrective actions and the insurance fund is in no imminent danger of running out of cash. If necessary, the agency could raise the FHA upfront premium to keep the fund in the black. However, Reps. Bachus and Capito also have concerns about FHA’s technological and management capacity. “It is incumbent upon our committee to get prompt answers to many of the questions surrounding FHA’s risk management practices and finances,” the Republicans say in a letter to Rep. Frank.

FHA has been critical to reviving the housing market. Since the loan limit was raised to nearly $730,000 in Orange County, for example, FHA loans have accounted for roughly 25% of home purchase loans here.

Speaking of FHA, I also saw a story on Bloomberg by my former Register colleague John Gittelsohn:

The Federal Housing Administration, the agency that insures home purchases made with down payments as small as 3.5 percent, may create another lending crisis, Toll Brothers Inc. Chief Executive Officer Robert Toll said.

“Yesterday’s subprime is today’s FHA,” Toll said today at a New York conference for builders sponsored by UBS AG. “It’s a definite train wreck and the flag will go up in the next couple of months: Bail us out. Give us more money.” Toll Brothers is the largest U.S. luxury homes builder.

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Regulator calls for ban on liar loans

Mathew Padilla — Thu, 19 Nov 2009 00:46:50 +0000

Comptroller of the Currency John Dugan today called on regulators around the globe to set minimum underwriting standards for all mortgages made in their respective countries.

For the U.S., prohibiting most forms of loans where borrowers elect not to provide proof of their income and/or assets is at the top of his list. Such loans are sometimes called “stated income” loans or less kindly “liar” loans.

Here are his top three suggested changes:

Verification of income and assets. Low- and no-documentation mortgages have performed extremely poorly in terms of delinquency, default, and foreclosure, he said. Not only do they invite misrepresentation and fraud, but these mortgages materially distort the integrity of other underwriting standards that rely on accurate measures of a borrower’s income. “Regulators should consider prohibiting this practice except in very, very limited circumstances where it clearly can be justified,” he said.
Meaningful down payments. As house prices rose, lenders responded by allowing lower down payments. With defaults low, lenders and investors then began to tolerate “no-money down” mortgages. “The effect has been pernicious,” the Comptroller said, noting that OCC data shows borrowers are much more likely to walk away from loans where they have none of their own money – or “skin in the game” – invested in the mortgage. Mr. Dugan said it will not be easy to decide how large a down payment is appropriate, since too high a requirement would result in many creditworthy borrowers being turned down for a mortgage. “We will need to exercise great care in striking that balance,” he said.
For mortgages with monthly payments that increase over time, qualifying borrowers on their ability to afford the later, higher payments rather than just the initial, lower payments. Too many “nontraditional” mortgages were structured so that payments were low at first, but increased over time, and sometimes very sharply. Mr. Dugan said that borrowers qualified at the lower initial rate often couldn’t afford the higher payments. “That is the type of underwriting practice that generally should be prohibited, because it often implicitly relies on house price appreciation as the ultimate source of repayment of the loan – and as we have learned all too painfully in the last two years, house prices can certainly go down as well as up,” he said.

On this blog we have had some recent heated debates on when stated income loans should be allowed — the answer is never. Read the last stated-income debate HERE.

And read the full release from John Dugan and the OCC.

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Mortgage volume to tank 30% next year

Mathew Padilla — Wed, 18 Nov 2009 09:00:05 +0000

A mixed forecast courtesy of National Mortgage News:

Residential originations will decline by almost 30% next year to $1.38 trillion as rising interest rates put a crimp on new originations, according to a new forecast from Fannie Mae. The GSE believes originations will total $1.95 trillion this year. (The Quarterly Data Report, a National Mortgage News publication, is forecasting $2.1 trillion in fundings this year.) Last month the Mortgage Bankers Association reduced its 2010 forecast to about $1.6 trillion. … Fannie’s economists predict the interest rate on 30-year fixed-rate loans will average 5.42% in 2010 compared to 5.07% this year. Refinancings will comprise only 47% of originations, compared to 67% this year. “We continue to expect a 10% increase in home sales in 2010,” Fannie chief economist Doug Duncan says in his monthly “Economic Developments” update report. He believes FHA will be the beneficiary due to congressional action to extend the first-time homebuyer tax credit and expand it to buyers in the move-up market. “The tax credit will likely be a boon for the Federal Housing Administration, whose share of purchase mortgages has increased significantly during the past year,” he said. FHA insured $170.6 billion in purchase mortgages in fiscal-year 2009 with 78.5% going to first-time homebuyers.

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Regulators tap Pimco to assess mortgage bonds

Mathew Padilla — Wed, 18 Nov 2009 00:29:17 +0000

Newport Beach-based Pacific Investment Management Co. was picked by the National Association of Insurance Commissioners to help assess companies’ portfolios of residential mortgage-backed securities, reports Bloomberg. Here’s more:

Pimco will help evaluate about 18,000 RMBS owned by U.S. insurers, the NAIC said in a statement today. The evaluations will help regulators determine how much capital insurers need to guard against losses on slumping home-loan investments.

Regulators are seeking assistance in valuing investments after the housing slump pushed up mortgage defaults. State insurance commissioners, which monitor portfolios to make sure carriers have enough money to pay claims, discontinued their use of RMBS credit grades issued by ratings firms including Moody’s Investors Service after downgrades caused a fivefold increase in capital requirements this year.

Pimco, a unit of Munich-based Allianz SE, was selected from a short list of 11 vendors that were considered by the NAIC, the regulator group said. Mark Porterfield, a spokesman for Pimco, didn’t immediately return a call seeking comment.

In related news, Calpers trims Pimco bond investments.

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Banks start foreclosure on 2,100 mortgages

Mathew Padilla — Tue, 17 Nov 2009 21:50:39 +0000

DataQuick reports lenders filed 2,152 notices of default in Orange County in October, down 3.2 percent from September but up 132.6 percent from a year ago.

Default notices fell for the third straight month, which could reflect borrowers getting more affordable terms to their loans under the Obama administration’s loan modification program.

Making Home Affordable is reaching more people, but it is unclear how many are getting permanent loan modifications. The administration won’t release figures on completed modifications until December. And those getting temporary modifications account for just 20 percent of all eligible loans at least two months past due.

Default notices initiate the foreclosure process and are typically filed after a borrower misses three or more monthly payments.

Banks foreclosed on 763 houses and condos last month, up 7.6 percent from the prior month and 3.5 percent from a year ago. Foreclosures fell for the previous three months, so it is too early to say if the October rise indicates a trend.

But if many borrowers don’t get permanent loan modifications, foreclosures will likely increase in the months ahead.

A separate report from a real estate agent showed a recent uptick in foreclosures and short sales listed for sale. Short sales are when a bank agrees to accept less than debt owed on a property. It’s also possible that short sales will increase, if modifications fail.

For sales and pricing information, check out Lansner on Real Estate.

The following table shows defaults and foreclosures (Forec.) going back to 2007:

Year	2009		2008		2007
Month	Defaults	Forec.	Defaults	Forec.	Defaults	Forec.
January	2,200	835	2,352	802	847	152
February	2,742	770	2,254	733	811	164
March	3,485	541	2,476	698	986	204
April	2,947	482	2,598	898	855	234
May	2,590	591	2,468	1,131	1,021	276
June	2,724	833	2,498	1,213	1,108	311
July	2,968	806	2,337	1,362	1,167	367
August	2,246	723	2,484	1,441	1,476	469
September	2,222	709	871	1,194	1,239	444
October	2,152	763	925	737	1,448	530
November			1,205	633	933	364
December			2,351	718	1,895	644
TOTAL	26,276	7,053	24,819	11,560	13,786	4,159

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A failed prosecution

Mathew Padilla — Tue, 17 Nov 2009 09:00:37 +0000

“There was a reasonable doubt on every charge,” said a juror in the case against two former Bear Stearns hedge fund managers. The quote comes from the New York Times.

Ralph Cioffi and Matthew Tannin were found not guilty of securities fraud in federal court in New York last week.

I am writing about the case now, only because I was too focused on other things to do it last week.

The collapse of the funds managed by Tannin and Cioffi marked the beginning of the credit crisis. In reality their case was great theater but not very significant. By the time the funds collapsed toxic debt had already spread to the books of countless banks here and abroad and was held by many investors. Subprime was the tip of the iceberg.

Still, a commentary by William Cohan for the Times is an interesting read. He writes:

In short, the prosecution blew it — on two counts. First, in devising the original indictment for conspiracy and securities fraud … it relied on damning snippets of lengthy e-mail messages that when viewed in their entirety proved to be highly ambiguous. Second, the prosecution made a reductionist opening argument claiming the men were nothing more than out-and-out liars, needlessly raising the bar in terms of what it had to prove to jurors.

So far I have not heard of any criminal charges against the real players in real estate finance’s recent boom and bust. It seems like the Securities and Exchange Commission’s civil charges against Angelo Mozilo, co-founder of Countrywide Financial, are the closest thing I have seen. (No opinion from me on his innocence or guilt, just noting the case.)

So what do you think?

Will we see many more criminal prosecutions?

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Fed to continue supporting mortgage market

Mathew Padilla — Mon, 16 Nov 2009 19:50:28 +0000

Ben Bernanke, head of the Federal Reserve, said Monday the central bank will continue to support the mortgage market while bank lending remains constrained, reports National Mortgage News. Here’s more:

“We continue to encourage banks to raise additional capital to support their lending. And we continue to facilitate securitizing through our Term Asset-Backed Securities Loan Facility (TALF) and to support home lending through our purchases of mortgage-backed securities,” the Fed chief told the Economic Club of New York. The Fed has purchased more than $800 billion in agency MBS and it recently extended its MBS purchase program through March 31. (The effort was originally slated to expire at yearend 2009.) The Fed chairman noted that banks have tightened their lending standards more than the central bank had expected. “Unfortunately, reduced bank lending may well slow the recovery,” Mr. Bernanke said. A Fed survey of senior loan officers in October found that 25% of banks had tightened their underwriting standards on prime single-family loans, a slightly higher percentage than reported in the July survey.

Bernanke seems to be saying the Fed is prepared to do more to support home lending.

Maybe it will extend purchases of mortgage securities beyond March 31 — if the Fed does stop buying MBS, mortgage rates are expected to rise at least 25 to 50 basis points (Note: there are 100 basis points in a percentage point).

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More foreclosures and short sales hit the market

Mathew Padilla — Mon, 16 Nov 2009 09:00:40 +0000

There were more foreclosures and short sales on the market last Thursday in Orange County than two weeks earlier — not a comforting trend heading into the holidays.

click to enlarge

The chart from Steve Thomas at Altera Real Estate in Aliso Viejo shows that while foreclosures and short sales (when a bank agrees to accept less than debt owed on a property) have declined over much of this year, over the past month they have been flat or increasing slightly.

It’s hard to say if this trend will continue. I expect at least a modest increase in short sales and possibly foreclosures as borrowers fail to get loan modifications under the Obama administration’s program. The most recent data about Making Home Affordable has shown a slight increase in folks getting help, but most people 60 days past due on their mortgage and eligible are not even in trial modifications and it’s unclear how many permanent modifications have taken place.

Back to Thomas, he notes in Orange County:

“There are currently only 339 foreclosures in all of Orange County (as actively listed for sale), an increase of 25 in the past two weeks.
Foreclosures only represent 4% of the active listing market.
Foreclosures continue to be exceptionally HOT and are, on average, selling for 3% above their asking prices.
There are currently 2,123 short sales on the active market, an increase of 48 in the past two weeks. Short sales currently represent 28% of the active listing inventory.”

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Investors up bets on foreclosures

Mathew Padilla — Sat, 14 Nov 2009 09:00:13 +0000

Is another housing bubble inflating?

click to enlarge

ForeclosureRadar.com reports investors bought 337 houses and condos at foreclosure auctions, known as trustee’s sales, in Orange County last month, up 21% from September and 157% from a year earlier.

Properties sold to investors are the blue columns in the chart (click for larger image). It’s clear from the chart that this year investors have been increasing their auction purchases. (The red columns are properties that became real estate owned, REO).

ForeclosureRadar reports that statewide the trend is the same; investors are competing more vigorously for auctioned properties:

Many auction investors are gaining confidence that they can make money reselling homes purchased on the court house steps, given the limited supply of homes available on the MLS and continued demand stimulus in the form of tax credits and low interest rates.

Maybe someone should tell investors about the big backlog in delinquent loans.

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Feds seize San Clemente bank that got taxpayer money

Mathew Padilla — Sat, 14 Nov 2009 02:01:34 +0000

Pacific Coast National Bank of San Clemente was closed today by federal regulators.

Customers with money in Pacific Coast need not fear for their deposits — they will all be assumed by Sunwest Bank in Tustin. The two branches of Pacific Coast National Bank will reopen on Monday as branches of Sunwest Bank.

The Federal Deposit Insurance Corporation estimates its insurance fund will take a $27.4 million hit from the failure of Pacific Coast.

Interestingly, Pacific Coast may be the first bank, or one of the first, to fail that received recent federal aid. Back in January the bank said it got $4.12 million of federal funds under the TARP program. At the time the bank said it was “well-capitalized.”

A few months later the bank said it realized its loan portfolio was worse than it appeared.

Pacific Coast National Bank is the 123rd FDIC-insured institution to fail in the nation this year, and the fifteenth in California.

Here’s from the FDIC:

This evening and over the weekend, depositors of Pacific Coast National Bank can access their money by writing checks or using ATM or debit cards. Checks drawn on the bank will continue to be processed. Loan customers should continue to make their payments as usual.

As of August 31, 2009, Pacific Coast National Bank had total assets of $134.4 million and total deposits of approximately $130.9 million. Sunwest Bank did not pay a premium to assume all of the deposits of Pacific Coast National Bank. In addition to assuming all of the deposits of the failed bank, Sunwest Bank agreed to purchase essentially all of the assets.

Customers who have questions about today’s transaction can call the FDIC toll-free at 1-800-913-3067. The phone number will be operational this evening until 9:00 p.m., Pacific Standard Time (PST); on Saturday from 9:00 a.m. to 6:00 p.m., PST; on Sunday from noon to 6:00 p.m., PST; and thereafter from 8:00 a.m. to 8:00 p.m., PST. Interested parties can also visit the FDIC’s Web site at http://www.fdic.gov/bank/individual/failed/pacificcoastnatl.html.

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