Is it a good time to buy?

For Americans wanting to buy a new home, there are always two time frames to consider:
Now and Later


It's why prospective home buyers love to ask the question: "Is now a good time to buy?" If now is not a good time, they reason, certainly later must be. Strangely, though, "Is now a good time to buy?" is a question that people ask their real estate agent but never Mr.Mortgage.


It's probably a good thing, because we have have seen a lot of changes over the last few months and we're expecting a lot more this year. But it's okay. You can ask me now: "Is now a good time to buy?"

And I answer: "Absolutely and unequivocally yes, if you have a five year time horizon."

Now is a good time to buy -- not because home prices are flat or because sellers are willing to make a deal-- but because none of us mortgage guys can predict what the mortgage market will look like "later". "Now" is full of knowns. "Later" is full of unknowns. Mortgage markets are seizing and lenders have no choice but to limit what they will lend and to whom. Stated income has largely disappeared and FICO requirements have increased dramatically in the last few weeks.

It may appear that lenders are going overboard with their restrictions but that's not the case at all. Lenders are simply more concerned about not wasting money than they are about making money. They have made far too many trips around the middle east and asia raising capital to "waste" it on a high risk borrower. Remember a loan is a earned, it isn't one of your rights below freedom of speech.

Today, a bank doesn't mind if it passes on 9 good loans in a stack of applications if it means that it also passes on the 1 bad one that's in there. Jumbo Mortgages are only a small percentage of the bank's balance sheet, but it's the uncertainty about the demand for mortgages by investors that makes them nervous. If mortgage bonds become worth less, the little guy could eventually topple the giant bank much like david vs goliath.

The first major change we expect to see is with second mortgages. Currently, 90% home equity lines of credit are available from most banks. Judging from the recent decreases of 150k Countrywide customers HELOC loan limits in CA and Chase limiting HELOCs to 80% LTV max and 65% in Las Vegas, we expect that percentage to fall to 80% or lower very soon.

The second major change we expect are more credit score-based fees. Currently, a 680 score puts mortgage applicants in the safe zone from credit-score based fees.
Expect that minimum score to raise to 720.

The third major change we expect is for the declining market designation to expand. This will force every home buyer to need an additional 5 percent (or more) of his own funds beyond what the bank's lending guidelines will allow. If you needed a 10% downpayment now, you may need a 15% downpayment later.

The fourth major change we expect is based on property type. New construction condos are in ample supply in many cities and that may create an overall weakness in pricing. If a single-family home requires a 20% downpayment, banks may protect themselves by requiring 25% downpayments on condos.

And the last major change we expect is for every mortgage product in existence to get a complete makeover. New minimum standards will apply in all categories.
It's impossible to know what these new standards will be, but expect mortgage lenders to follow their losses and trim their menus accordingly. If you find yourself in the same Risk Class as other homeowners with high default rates, expect a tough road ahead. We have seen rates from Fannie Mae on adjustable rates for low FICO borrowers move from 7%-8% to 10%+. Investors are demanding higher rates to compensate for the enormous defaults. Someone has to pay the tab.
So back to the question: "Is now a good time to buy?"

Yes it is. Not because homes may be priced right, though, but because mortgage products should look very different come this Fall. And no matter how "cheap" the home, you can't buy it if you can't get financing for it or write a check for it. If you are considering buying or refinancing look at your mortgage options now.

New Conforming Loan Limit Announced.

Beginning tomorrow, the new conforming limit on loans insured by the Federal Housing Administration will be temporarily raised to $729,750, more than double the current limit of $362,790, the U.S. Department of Housing and Urban Development announced today.
The limit, which is good until the end of the year when it reverts back to $362,790, will apply only to loans insured under a program administered by FHA, which targets low to moderate-income home shoppers.
HUD will announce tomorrow the new conforming loan limit for all markets, a spokesman said. Conforming loans are sold to government-sponsored buyers such as Fannie Mae and Freddie Mac and have a current limit of $417,000 in California and most states.
The FHA and conforming limit increases could give the housing market a boost. Rates on jumbo loans, which are above the limit, have risen to about a percentage point above conforming rates.
The average rate Tuesday on a 30-year fixed conforming loan in Orange County was 5.841% with a one-point fee, while the average jumbo rate on a 30-year fixed was 6.908% with a one-point fee.
But Fannie Mae and Freddie Mac have yet to say when they will begin buying larger loans or if they will impose any restrictions, such as requiring larger down payments. Some housing watchers say rates on loans up to $729,750 might not drop as much as government officials hope.
President Bush signed a stimulus package into law last month that included granting HUD the power to raise the conforming limit based on 125% of the median home price in high-cost areas. HUD said today Orange County’s median home price is $710,000. That’s much higher than DataQuick, which pegged the median home price in January at $520,000 for all houses and condos, and $583,250 for just resale houses.
HUD said it calculated median prices based on government and commercial data.
From HUD’s release, here is a list of each county in California, with the median home price and the new FHA limit on the far right. HUD tomorrow is expected to release limits for areas in other states. To find the new limits for your county visit the direct HUD search tool here.

Alameda County 995000 729750

Alpine County 438000 547500

Amador County 355000 443750

Butte County 320000 400000

Calaveras County 370000 462500

Colusa County 318000 397500

Contra Costa County 995000 729750

Del Norte County 249000 311250

El Dorado County 464000 580000

Fresno County 305000 381250

Glenn County 230000 287500

Humboldt County 315000 393750

Imperial County 260000 325000

Inyo County 350000 437500

Kern County 295000 368750

Kings County 260000 325000

Lake County 321000 401250

Lassen County 200000 271050

Los Angeles County 710000 729750

Madera County 340000 425000

Marin County 995000 729750

Mariposa County 330000 412500

Mendocino County 410000 512500

Merced County 378000 472500

Modoc County 125000 271050

Mono County 370000 462500

Monterey County 599000 729750

Napa County 615000 729750

Nevada County 450000 562500

Orange County 710000 729750

Placer County 464000 580000

Plumas County 328000 410000

Riverside County 400000 500000

Sacramento County 464000 580000

San Benito County 790000 729750

San Bernardino County 400000 500000

San Diego County 558000 697500

San Francisco County 995000 729750

San Joaquin County 391000 488750

San Luis Obispo County 550000 687500

San Mateo County 995000 729750

Santa Barbara County 615000 729750

Santa Clara County 790000 729750

Santa Cruz County 719000 729750

Shasta County 339000 423750

Sierra County 228000 285000

Siskiyou County 235000 293750

Solano County 446000 557500

Sonoma County 530000 662500

Stanislaus County 339000 423750

Sutter County 340000 425000

Tehama County 250000 312500

Trinity County 200000 271050

Tulare County 260000 325000

Tuolumne County 350000 437500

Ventura County 599000 729750

Yolo County 464000 580000

Yuba County 340000 425000

Conforming Jumbo Limit Changed, but wait.......

Congress' plan to help the jumbo loan market -- passed two weeks ago as part of the Economic Stimulus Act -- still is a work in progress. Key details of the plan were left to the Department of Housing and Urban Development to nail down, which may take until next month. What's more, the securities industry's biggest trade group last week surprised lenders when it recommended that larger loans be in effect isolated from smaller mortgages in the "secondary" market, where loans are packaged into securities for sale to investors.That could keep interest rates on jumbo loans higher than some borrowers had hoped, analysts say. All of this has many homeowners who want to refinance, as well as would-be buyers, on edge -- particularly in the high-priced markets. The market for large jumbo mortgages has been a major casualty of the credit crunch that has slammed the economy since late summer.

As loan delinquencies have soared and scores of mortgage lenders have folded, many remaining lenders have become unwilling to make loans unless they know they can sell them to Fannie Mae and Freddie Mac, the government-sponsored mortgage finance companies.But under federal rules, Fannie Mae and Freddie Mac couldn't buy loans larger than $417,000 -- the limit for what was labeled a "conforming" mortgage.The Economic Stimulus Act gave HUD the ability to boost conforming loan limits in high-cost areas to as much as $729,750 through the end of this year.The hope was that that would quickly help support refinancings and home purchases in expensive markets hit hard by the housing downturn. But Congress left it to HUD to set new conforming-loan limits by region, based on a formula that takes into account the median home price in each region. The department has 30 days from Feb. 13 -- the date President Bush signed the act -- to revise the jumbo conforming loan limits. HUD officials said this week that they had not yet come up with numbers. The department is expected to set new conforming limits on a county-by-county basis, just as it does for Federal Housing Administration-insured loans. If HUD's home-price data are similar to recent figures published by DataQuick Information Systems, analysts say conforming-loan limits would skyrocket through much of California, from the current $417,000 to at least $572,500 in Los Angeles County and $650,000 in Orange County.

Loan balances, however, are just one component of what makes a loan conforming. Other issues include the type of income documentation provided and a borrower's credit score. At Freddie Mac in McLean, Va., spokesman Doug Duvall said the company was discussing what the standards should be for larger conforming loans."We are going to be defining the loan-to-value ratios, how much down payment the person needs and the credit score of the borrower," Duvall said. "These are some of the things that we measure. We are wrestling with how different those will be from the traditional conforming" loans.Even if Freddie Mac and Fannie Mae begin buying significant numbers of larger loans, it isn't clear how significant an interest saving that will mean for borrowers.

Since the bad inflation reports and government intervention in the mortgage market three weeks ago the rates for 30Y fixed jumbo loans has moved up .50%. Th best value for clients is the 5Y and 7Y jumbo interest only loan. We have seen various information that possibly fifteen counties in the whole country would see a boost. Your neighborhood might be expensive but HUD is using the median for your county. The Hollywood Hills Real Estate you've haid your eye on and that condo in South Beach might be 1.5m but both counties have a median value in the mid 500's.

In our opinion this proposal was created to address the home owner with a jumbo loan balance in the 417-600k range. This is a bandaid on a large wound. Credit markets will continue to contract until the losses stop and the loans begin to perform again.

New Conforming Loan Limit Becomes Law.

President Bush on Wednesday signed H.R. 5140, the Economic Stimulus Act of 2008, making official a temporary boost to both conforming and FHA loan limits. This might be the stiff drink the real estate market needs. The new law boosts the GSE conforming limit to as much as $729,750 through the end of this year, and also raises FHA lending limits to the same level for high-cost areas.

“I know many Americans are worried about meeting their mortgages,” President Bush said prior to signing the bill. “My administration is working to address this problem.” Bush cited HOPE NOW and the recently announced Project Lifeline initiative as examples of ongoing work by the administration to address the housing crisis.

A White House-produced fact sheet covering the new growth package is available here.
The U.S. Department of Housing and Urban Development now has 30 days to publish a database of house prices that will be essential in determining which markets get access to the new ‘jumbo conforming’ or ‘expanded FHA’ loan products.

Of course, that could prove to be bit of a problem in and of itself, given that HUD doesn’t currently independently gather or otherwise publish home price data. Bankrate’s Holden Lewis was on this right from the start when Congress first passed the bill:
The Office of Federal Housing Enterprise Oversight, or OFHEO, compiles periodic indexes of home prices. Fannie Mae and Freddie Mac use the OFHEO data each November to update the next year’s conforming limit.

The Federal Housing Finance Board and the National Association of Realtors both collect and publish home prices. The FHA takes information from both entities to calculate the FHA limits for each metro area.

Congress could have pegged the conforming and FHA limits to data collected by OFHEO, the Federal Housing Finance Board or the Realtors. But it didn’t. Instead, the law says: “The secretary of Housing and Urban Development shall publish the median house prices and mortgage principal obligation limits … for all areas as soon as practicable.” The law gives HUD 30 days to publish the database of house prices.

The simplest solution would be for HUD to use the same house price information it uses to calculate FHA loan limits. But a HUD spokesman says: “We have not yet determined if the same data will be used to make the new calculations.” That leaves lenders in the dark until HUD makes a decision.

While price designations aren’t yet known, a few industry sources close to the process have suggested that the new conforming limits won’t be as broadly applied as many might expect; just 15 counties in California might be designated as eligible for the loan limit increase, for example.
That’s not the only grey area out there, of course — there’s also the as-of-yet unclear issue of TBA trading in the secondary market that will need to be settled. Mortgage bonds are sold before the loan are completed and funded. That's why you lock in a rate. (The unconfirmed word from our sources today is still that the industry agency SIFMA wants to keep the new ‘jumbo conforming’ loans out of TBA pools.)

It’s also unclear exactly how the new jumbo conforming will price, given that neither Fannie nor Freddie have experience underwriting within the jumbo mortgage market.

Similarly, it isn’t exactly clear what the initial underwriting criteria will be, although most expect it to at least sit close to existing ‘traditional conforming’ guidelines — if not ending up more restrictive. “OFHEO has already gone on record saying that jumbo loans are more risky, so I wouldn’t be surprised if the underwriting guidelines end up being tighter than what you’d see for usual conforming products,” said one executive at a large lender, who asked not to be identified.

Senate Passes Conforming Loan Increase!

As part of the overall Economic Stimulus package the Senate voted and passed the provision within the bill to expand the conforming loan limits to allow Fannie Mae and Freddie Mac to buy conforming loans worth as much as $729,750 for loans made between July 31, 2008 and Dec. 31, 2008, an increase over the current $417,000 loan limit, a move that could help struggling homeowners to refinance jumbo loans at a lower interest rate. It will also allow the Federal Housing Administration to insure loans as high as $729,750 in expensive markets. To find your areas median home value visit the National Association of Realtors site. They have the most user friendly numbers.

This should be a welcome boost to home sales within the price range of the 125% upper limit for median value of a city. We don't expect a dramatic improvement in 30Y jumbo loan rates, most analysts are speculating that rates might improve by as much as .50% compared to where they are now. Historical low jumbo loan rates are available now on 5Y, 7Y and 10Y fixed most clients are locking in rates in the low to mid 6% area. This is down from the mid to high seven percent range over the last few months. The jumbo market most improved by the congressional action is likely to be the 30Y fixed as investors(banks, foreign investors, etc) don't have a great appetite for 30Y paper so they are demanding higher rates than what one would expect.

The conforming loan limit change doesn't happen till mid summer. For those in falling markets looking at their neighborhood drop in value it is wise to consider your refinance options now as equity is the most important factor in lending. To get the best loan terms your loan balance should be no more than 80% of the value of your home and of course having great credit gives you access to the best jumbo loan rates.

Conforming loan limit increase, two steps away.

Rates for some long-term mortgages are at their lowest levels in four years, the Federal Reserve is expected to cut some short-term interest rates Wednesday and proposals in Congress may soon allow thousands of jumbo loan borrowers to qualify for loans with lower interest rates.
The industry has not seen demand for jumbo mortgage loans at these levels since 2003.

Should you refinance?
The answer depends on a variety of factors: your' current loan terms, how long they plan to stay in your home, how much equity you have, your credit scores and more. It's deeply important to sit down and understand how all the pieces play together.

Help for the jumbo loan client is on the way. Economic stimulus legislation approved Tuesday in the U.S. House of Representatives includes a provision that would temporarily allow government-sponsored mortgage finance companies Fannie Mae and Freddie Mac to increase the conforming loan limit up to $729,750. The new conforming loan limit change is being anxiously awaited by all market participants as it is seen as the best part of the stimulus package. People are not excited about a check for a few hundred dollars when the prospect of not being able to refinance is real for millions of prime borrowers in adjustable rates who have little to no equity. The new requirements at most banks is to have at least 10% equity at the time of purchase or refinance. The new conforming loan increase would allow up to 100% loan to value.

Traditionally, the gap between conforming and jumbo loan rates has been narrower. What the credit crunch has done is led to, effectively, a buyers' strike among investors that buy jumbo mortgages because they are not backed by an implied government guarantee like conforming loans. Until more investors opt to purchase bonds backed by jumbo loans, the wider-than-normal gap in rates will remain. The best rates are available within the 5 and 7Y fixed jumbo mortgage rate programs. Thirty year fixed money remains higher as investors don't have the appetite to lend large balance loans on a fixed basis in this environment. Investors believe rates should and could be higher in the future so they are offering ARMs. Many banks don't offer any 30Y fixed as a result of the interest rate risk.

The short-term rate-cut the Federal Reserve was expected to announce Wednesday would not have any direct effect on long-term jumbo mortgage rates, although it will affect rates for things like home equity lines of credit and consumer credit cards. Nonetheless, news about Fed actions often prompts homeowners to take action. This is especially important if home values have been soft or falling in your area as equity is more important in a refinance than FICO score for most large balance scenarios.

If Congress makes that change, possibly by mid-February, banks and investors will be inundated with refi business, we have seen a dramatic increase in applications since the Bush gave his economic stimulus speech two weeks ago and the stock market tanked following MLK Jr day. There is a window that's going to be there; we don't know how long it's going to be there and are advising clients to lock at these levels. Don't get greedy by holding out for a rate that may never come as falling values create a situation where clients rates are substantially driven by their lack of equity. Get a package in place right now. I would not wait. Good candidates for refinancing: having equity in your home.

With property values declining in so many markets, the main thing to look for is whether the equity is there. Those who have at least 20 percent equity in their home - that is, their loan balances are equal to 80 percent or less of their home's market value - will have the easiest time refinancing. In areas that some lenders have designated as "soft" or "declining" markets, where home values are sliding, borrowers must have even higher levels of equity before lenders will approve a loan.

Also factoring into the "to refi or not to refi" conundrum this time around is whether borrowers measure up to the newly tightened underwriting guidelines. The most competitive rates are available to those customers with credit scores of 720 and substantial verified assets in bank/brokerage accounts. Borrowers these days also need to be prepared to provide proof of their income and assets, and sometimes tax returns.

Refinancing might not be advisable - or possible - for homeowners with impaired credit, or those who can't provide documentation of their income, or who have little equity and live in what can be determined as a declining market. It is far better to know your choices now than to procrastinate and find out that recent home prices and lending guidelines prevent you from refinancing your jumbo mortgage. Look for the Senate to vote and Bush to signoff by mid Feb.

Conforming Loan Limit Increase and other ways to revive the patient.

It's always nice to take a step back every once in a while and try to see the bigger picture of what has happened in the past, and where we are right now. In my mind, when I do this I see so much stimulus injected into US economy and institutions and we aren't even in a recession yet, at least not in the minds of the organization that will ultimately declare it; the NBER. On a positive note, with the latest stimulus package there will be a temporary increase in the conforming loan limit for homebuyers; a positive incentive for those who both intend to purchase and can afford to purchase a home, especially here in Southern California where 50% of all jumbo loans are found. These jumbo loan changes should help affordability and ultimately help reduce record setting inventory in formally hot markets. Everything and anything can sell at the right price, econ 101.



Lets just list what stimulus we have seen since late 2007:

a) 175 basis points of cuts to fed funds rate; 1.75%

b) Cash injections into Merrill & Citigroup

c) Buyout of Countrywide Financial; whose stock price today is trading below the buyout price

d) Mortgage Rate Freeze Plan

e) Talks of Bond Insurer Bailout Plan; $15 Billion to cover Hundreds of Billions in potential losses, think of the failed Super SIV rescue plan that also boosted banks when announced

f) In Europe, bond bailout of Northern Rock by gov't to incentivize private takeover

g) Economic Stimulus Plan For Housing; make mortgages easier to get & cheaper

h) Economic Stimulus Plan For Biz; tax breaks

i) Economic Stimulus Plan For Tax Payers; checks to 117 million Americans

I'm sure I am missing a bunch of other cash injections to individual banks/brokerages, but am I missing any other major stimulus thus far? I think I got most of it. Now, again, there is still a debate about whether we are in a recession or not right now as chances are we won't find out until later on anyway. But forget that for a moment. Look at that list above! Are we really to believe that the economy is in fine shape with all this stimulus going on? How could we simply ignore the reasons for all this stimulus in the first place!

It's encouraging to see things happening, but will it all work? Will it stop defaults from rising? Will it cause more bubbles? Will it encourage a moral hazard and future reckless behavior? Will it stop housing from falling? Will it fix the credit markets? Will it fix the toxic waste holdings held on the books of financials? Will it really save the bond insurers? Will it stimulate consumer spending and consumption? Will it bail out those who made awful decisions? So many questions. So little answers!

With all this stimulus, it's not surprising that equity markets are bouncing here; but what I'm interested in is will this fix the problems we face without causing any future bubbles/inflation problems? Is this delaying the inevitable washout? All open for discussion as I wont give any predictions with so much uncertainty out there.

On a side note, the conforming loan limit increase moves the limit from $417,00 up to $730,000 until December 31st! The number varies per area based on 125% of median home values. The median in Los Angeles for example is just south of 500k. I think this is overall a good thing for client's but it does come with some question marks. Here are my thoughts:

POSITIVES: cheaper jumbo loan mortgages & cheaper fees for those serious buyers who have every intention of buying a new home. May increase purchase price budgets a bit with savings from taking on non-jumbo loan; hopefully with caution by the buyer not to exceed affordability. The experience of all the foreclosed families may prevent reckless buyers who decide to purchase based on this incentive alone but cant really afford it.

NEGATIVES: incentivizing homebuying by cheaper loans, how is this any different than what got us into this mess to begin with (no doc loans, option ARM's)? What happens if someone who is on the cusp of affording to buy, gets convinced to purchase due to this temporary offer? Will this setup future problems of distressed sellers should we indeed enter a recession? Will it really bring MORE buyers into our marketplace OR convince prospective buyers to increase their budgets dramatically thus rendering the investment unaffordable?

Overall, I would have think this is a positive for our marketplace. Since most people put max 20% down, and most condo buyers like to put only 10% down, we are looking at a target group of sub $785,000 for single family homes, and $695,000 or so for condos.
It will help those that have every intention of buying to 'pull the trigger'; hopefully without upping their budget too much! That's the only downfall I can see; over leveraging via a higher loan amount due to the projected 1% savings on the rate of the new conforming loan limit increase.
Where are we at in the real estate cycle and overall credit cycle?























Or is this the chart?: