Higher FHA Loan Limits Reinstated for High Cost Housing Markets

Uncle Sam has thrown California and other high-priced housing markets a lifeline.

President Obama on Friday signed into law a bill that will reinstate higher limits for Federal Housing Administration-backed mortgages in high-cost areas. In expensive housing areas such as Los Angeles and Orange counties, the limit for these FHA-backed loans had dropped to $625,500 from $729,750 on Oct. 1. The change became effective Friday.

Similar ceilings applying to loans that can be backed by Fannie Mae and Freddie Mac will not increase. The California Assn. of Realtors and its larger national partner association had lobbied for all of the loan limits to be reinstated.

The group is “pleased the Senate and House were able to come to a reasonable compromise,” LeFrancis Arnold, president of the group, said in a statement Friday. “However, we are disappointed that the Senate and House could not agree on increasing the loan limits for Fannie Mae- and Freddie Mac-insured loans.”

A bipartisan group of California lawmakers had sought the increase of all of the old limits, but the House Appropriations Committee had raised concern that Fannie and Freddie, which have received more than $150 billion in financial rescue money from taxpayers, have received public scrutiny for “questionable business practices,” The Times previously reported.

The FHA has also come under increased scrutiny as that agency said in a report to Congress this week that it could be headed for its own taxpayer bailout.

Rep. Brad Sherman (D-Sherman Oaks), in a statement said the passage of the higher FHA loan limits would help “prevent a collapse of housing prices in high-cost areas like Los Angeles.”

Indeed, sales of properties in Orange and Los Angeles counties with loans between $625,500 from $729,750 fell sharply, to 102 last month, according to San Diego real estate firm DataQuick. That was a 71% decline from 350 in September and down 71.5% from 358 sales in October 2010.

But the Obama Administration warned this week that it is important for the federal government to get out of the mortgage business.

“We believe that lowering the limits is a step to ensuring that private capital will return to the market,” Carol Galante, the acting FHA commissioner, said during a congressional confirmation hearing Thursday. “We understand at the present time FHA is playing a somewhat outsized role in the market.”

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Is It Really Time to Buy a Home?

On Monday, we gave you the links to four different articles that came to the same conclusion: it’s time to buy a home. Today, we want to take a closer look at one of the sources, the JP Morgan’s Market Insights report. Right from the beginning, the paper identifies the greatest challenge in today’s housing market: consumer emotion. They attempt to overcome that emotion with logical reasons why now is the time to buy a home. They break it down to the following.

Price-to-Income Ratio
One measure of housing values is the ratio of personal income to home prices. The report explains where we are today:

“Since 1966, the median price of an existing single family home in the U.S. has varied between 150% and 251% of personal income per household. However, roughly three-quarters of the time it has been in a relatively narrow band between 185% and 230%. In September 2011, the ratio was just 153%, implying that to get back to an average price to income ratio, home prices would have to rise by about 27%.”

Current Mortgage Interest Rates
With current 30 year mortgage rates, housing payments are at historic lows as compared to personal income.

“During the week of October 7, Freddie Mac reported that mortgage rates had fallen to an average annual level of 3.94%. Assuming the use of a fixed rate mortgage with 20% down, this would make the median mortgage payment on a single family existing home just 6.9% of per household personal income, compared with an average of 14.4% since 1966.”

Monthly Rent vs. Monthly Mortgage Payment
Is it less expensive to own a home or rent a home? The answer to this question helps families make the decision whether or not to buy a home. The report explains:

“By the third quarter of this year, we estimate that the implied median mortgage payment had fallen to just 78% of the median asking rent…”

Bottom Line
The paper comes to the conclusion that now is the time to buy.

“The numbers on housing have an important message for American families today, and particularly younger families setting out on life’s great adventure: Five years ago, at the peak of the home-buying euphoria, it was emphatically a time to rent. Today, when home ownership is depreciated more than ever before, the numbers tell us it is a time to buy.”
We agree.

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Short Sale vs Foreclosure: A Short Sale Always Wins

Today's ever changing real estate industry has brought upon some very challenging questions from our clients. We as counselors, want to put forth the best, non-emotional advice that we can, in hopes that we can help our clients and their families navigate the rough waters of the short sale process.

The most prevalent question and one that continues to permeate the industry is:

"Why should a seller go through the short sale process rather than letting their house be foreclosed upon?"

While we cannot speak to every client circumstance, we can say one thing with complete conviction. In almost all instances in which a potential seller is contemplating whether they should short sell their house or let it go through the foreclosure process, a short sale is the better option. The following are examples to consider:

Example A: Short Sale

Mr. Smith owns a home in which he has a mortgage balance of $220,000 and a current market value of $150,000. Mr. Smith has elected to short sell his property. His realtor successfully obtains a buyer who puts forth an offer price of $120,000 (80% current market value according to Realty Trac Foreclosure Report 5/26/2011). After reviewing the buyers offer and the financial hardship information from Mr. Smith, Mr Smith's bank agrees to accept the short payoff of $120,000 which would leave a deficiency balance of $100,000.

The transaction closes and is final. Mr. Smith then pulls his credit report 30 days after the transaction takes place. On the report he notices that the mortgage trade line states "Mortgage debt was settled for less than full and the balance on the mortgage is $0." Mr. Smith is now on the road to financial recovery.

Example B: Foreclosure

For the ease of illustration we will use the same value and mortgage debt amounts as in Example A. However, Mr. Smith has elected to forgo the short sale process and let the bank foreclose on the property. The bank holding his mortgage facilitates the proper legal procedures to foreclose on the property, all of which are costly. Mr. Smith is notified and his property foreclosed upon of which is taken back by the bank to sell as an REO.

Six months later, the bank finally sells Mr. Smith's home only they sell it for $90,000 (60% of current market value according to Realty Trac Foreclosure report dated 5/26/2011). Remember, as a short sale, the home would have sold for $120,000 keeping the deficiency to $100,000. In addition to the deficiency now being $130,000, the bank has elected to add on legal costs of $15,000 and asset preservation costs of another $5000 for a total deficiency liability of $150,000. Mr. Smith pulls his credit report 30 days after being notified that the bank has sold his property and of his liability.

On the report he notices that the mortgage trade line states "Foreclosure" and the balance is $150,000. Because of Mr Smith's choice to choose foreclosure vs. short sale his road to financial recovery has taken a major detour. He not only has a foreclosure on his credit report but now has a much larger deficiency balance in which the bank, in most cases, will report on his credit report as a balance owed.

The Best Option is Clear

While the financial and credit advantages are clear when choosing a short sale over a foreclosure, other advantages are sometimes overlooked. The most important of all of them is maintaining the seller's dignity and peace of mind. We have heard too many stories of families having to leave their homes because of a Sheriff's order or some other type of legal action. The short sale process alleviates this negative social impact. The process puts the control back in the seller's hands so that they can get back on the road to financial recovery and start providing for their families. In the battle of the two evils, a short sale always wins!!!

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1 in 4 OC Homes Are Mortgage Free

Imagine not having to pay any rent or make mortgage any payments.

In Orange County, almost one out of every four homes are in that boat because their owners don’t have a mortgage, according to U.S. Census data released Thursday.

We’re talking 100% equity. Free and clear. Housing costs as low as $500 a month.

And the number is growing.

The countywide percentage of mortgage-free homes has been rising during the past seven years, no doubt because of the higher proportion of all-cash homebuyers who surfaced in the wake of the credit crunch.

For example, the proportion of mortgage-free homes in O.C. increased from 21.6% in 2004 to 24% in 2009 and 2010, census figures show.

And in Westminster, nearly 37% of homeowners — more than one out of every three owners — don’t have a mortgage, census figures show. That’s the highest proportion of free-and-clear homeowners among the dozen O.C. cities for which mortgage data was available.

The city with the lowest proportion of homeowners without a mortgage: Irvine, where fewer than 17% of the homes are owned free and clear, leaving the other 83% stuck paying off home loans for decades to come.

It may not be a coincidence, since Irvine is relatively pricey compared to Westminster. The median price of an Irvine home averaged nearly $556,000 in August vs. Westminster’s median home price of less than $403,000, according to DataQuick.

The latest numbers are part of the American Community Survey for 2010. The report shows further:

-Of the 584,314 owner-occupied homes in the county, 444,114 have a mortgage, while 140,200 are mortgage-free.
-Among homes with a mortgage, median monthly housing costs totaled $2,597.
-Among homes without a mortgage, median monthly housing costs totaled $478.
-Among homes with a mortgage, 41.6% of households paid 35% or more of their monthly income on housing costs.
-Among homes without a mortgage, 12.9% of households paid 35% or more on monthly housing expenses.

Other cities with above-average proportions of mortgage-free homes:

-Fullerton: 27.8%
-Huntington Beach: 27.0%
-Costa Mesa: 26.4%

Other cities with below-average numbers of mortgage-free homes:

-Lake Forest: 18.8%
-Mission Viejo: 19.8%
-Orange: 22.0%

The margin of error ranges from 2.6% in Anaheim to 6.3% in Westminster — although that city remains at the top of the heap, even if the numbers are 6% off.

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More Distressed Listings: Anaheim or Anaheim Hills?

Every two weeks, Orange County broker Steve Thomas publishes a report on the supply of local homes for sale. Here's what the latest report – as of September 1 – has to say about Anaheim...
-555 residences listed in brokers' MLS system with 215 new deals opening in the past 30 days.
-By Thomas's math, this community has a "market time" (months in would take to sell all inventory at current pace of new escrows) of 2.58 months vs. 2.52 months found two weeks earlier vs. 2.71 months seen a year earlier. Countywide, latest market time was 3.53 months vs. 4.05 months a year ago.
-So, homes in this community sell – in theory – in 27% less time than the countywide pace.
-Of the homes listed for sale in this community, 339 were either foreclosures being resold or short sales, where sellers owe more than the home's value. So distressed properties were 61.1% of supply of homes for sale vs. 33.8% countywide. Anaheim had the highest share of distressed propertoes for sale in the county!
-Homes for sale in Anaheim represent 5.2% of Orange County inventory – and 9.3% of all the distressed homes listed for sale in Orange County. New escrows here are 7.1% of all Orange County's new pending sales.

For Anaheim Hills …

-174 residences listed in brokers' MLS system with 57 new deals opening in the past 30 days.
-By Thomas's math, this community has a "market time" (months in would take to sell all inventory at current pace of new escrows) of 3.05 months vs. 3.30 months found two weeks earlier vs. 4.16 months seen a year earlier. Countywide, latest market time was 3.53 months vs. 4.05 months a year ago.
-Of the homes listed for sale in this community, 61 were either foreclosures being resold or short sales, where sellers owe more than the home's value. So distressed properties were 35.1% of supply of homes for sale vs. 33.8% countywide.
-Homes for sale in Anaheim Hills represent 1.6% of Orange County inventory – and 1.7% of all the distressed homes listed for sale in Orange County. New escrows here are 1.9% of all Orange County's new pending sales.

Compare these trends to countywide patterns:
-Cities with highest level of distressed properties among their listings? Anaheim was tops – 61.1% – followed by Buena Park at 58.3% of listings and Rancho Santa Marg. at 57.8% of listings.
-Fewest? Corona Del Mar was tops – 3.8% – followed by Seal Beach at 4.5% of listings and Villa Park at 6.7% of listings.

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