Here Comes the Luxury Market!

Here Comes The Luxury Market!
Just when we thought home sales were shifting toward downsizing we get NAR’s news release that reports sales of existing homes prices above $1M jumped over 16% in October from a year ago, outperformed every other price segment. The next strongest was the $750k-1M range, up over 12%. Sales of homes prices under $100k fell 6%.
As the U.S. stock market raises, so do sales of million-dollar homes, a relationship not lost on the nation’s Realtors.
“There is little volatility in the stock market. It is whoppingly higher, so people in the top 10% of wealth are really feeling confident now,” said Lawrence Yun, chief economist for the National Association of Realtors.
For a point of reference, the median price of a U.S. home sold in October was $208,300. Luxury homes make up just 2.2% of the housing market. Lower-end, distressed homes had been making up the bulk of sales over the past two years, but there are now fewer of those on the market. Just 9% October sales were either foreclosures or short sales.
As expected, much of the growth in the luxury segment is fueled by international interest: Miami, Los Angeles, Riverside, and New York. The majority of these buyers are from China, Canada, Europe, Russia and South America and they are making cash purchases.
The ultra prices homes of $5M+ were up 18% in Q3, according to Redfin real estate brokerage.
Where is the luxury market heading?
“…I think the bull market is about to run its course,” said Nela Richardson, chief economist for Redfin. “If you look at the markets where there has been a lot of international investor activity, you’ll see that the participation has actually dropped quite a bit.”
While the international market cools there are healthily pockets of luxury within otherwise affordable areas. Houston, for example, where the median home price is well below the national average, is number six on a Redfin survey of markets with the most million-dollar sales. It beat out Boston, Washington, D.C., and Seattle.
“It’s the new economy of the energy boom and other industries moving inland and taking dollars with them. Our agents are going crazy in Houston,” Richardson said.
Condominium developers in Manhattan also point to this American-made surge in luxury buyers.
Excerpts from 11/20/14 report by Diana Olick.

“Fed Speak” Becomes Uncommonly Clear

“Fed Speak” Becomes Uncommonly Clear
Over the years it has been a challenge to read what the Fed says let alone what it is going to do.
Those who lived and worked through Chairman Alan Greenspan’s reign will recall how the term “Fed Speak” was given birth.
Well, today we have a breath of fresh air, if the economic weather holds fast.
Federal Reserve Governor Jerome Powell appeared in an interview on CNBC today and gave some insight into what the Fed is weighing as it decides when to raise the prime rate in the coming months.
• “If we stay on the current path it would make sense to raise rates sometime during 2015, perhaps in the middle of 2015…”
• “The time to raise rates is coming; it’s just not here yet…”
• “Inflation is below the Fed target of 2.0%…”
• “Unemployment is above target…”
• “And both of these suggest need for continued accommodation…”
• “Inflation is weak around the world and here, energy prices are low here and that is going to feed into inflation here for a while. Inflation is likely to remain low for some time…”
• “We need to see progress toward the 2.0% target…”
• “Interest rates are low, stock prices are high and energy prices are low. All of those things are supportive of consumer activity. Consumer Confidence hit a 7-year high on Friday.”
• When asked whether low-interest rate policies have created excesses in the financial system that would come back to haunt us, Powell answered: “I would say things are fully prices out there but I really don’t see bubble territory and we don’t see leverage building up and that sort of thing. I can’t make a case that we are at risk of significant financial instability.”

Reference-Economic Focus

Call Jonathan Burdick at 480-336-2828 for your free, confidential mortgage options consultation!

The Perfect Loan File

   The Perfect Loan File

The media has it all wrong – securing mortgage approval and satisfying credit underwriting guidelines are not the difficulties plaguing mortgage consumers. It’s in meeting the rigorous documentation requirements that most people fall flat. The good news is, the fix is simple. Just scan, photocopy, fax, and deliver every aspect of your financial life. Then, shortly before closing, check everything again.

Mortgage consumers who enter the mortgage approval process ready to battle their chosen mortgage lender will come out with a nightmare story to tell. As the process, requirements, and guidelines are the same for everybody, your mindset is the game-changer. Accepting the redundant documentation necessary for lender approval will make everyone’s life easier.

When I was a kid, my father occasionally issued directives that I naturally thought were superfluous, and when asked why I needed to do whatever it was he wanted me to do, his answer was often: “Because I said so.” This never seemed to address my query but always left me without a retort, and I would usually comply. This is exactly what consumers should do during the mortgage approval process. When your lender requests what seems to be over-documentation and you wonder why you need it, accept the simple edict – “because I said so.” You will find the mortgage approval process much less frustrating.

So, what’s the perfect loan? Well, it’s one that (a) pays back the lender and (b) pays back the lender on time. Underwriting the perfect loan is not the goal that mortgage lenders aspire to today.

The real goal is the perfect loan file.

Mortgage lenders have suffered staggering losses and gone out of business because of the dreaded loan repurchase. As mortgage delinquencies increased, Fannie Mae and Freddie Mac began to audit mortgage loans they had purchased and discovered substandard and fraudulent underwriting practices that violated representations and warranties made, stating these were high quality loans. Fannie and Freddie began forcing the originating lenders of these “bad” loans to buy them back. So a small correspondent mortgage lender is forced to buy back a single mortgage loan in the amount of $250,000. This becomes a $250,000 loss to a small mortgage business for a single loan, because it will never be repaid.

It doesn’t take many of these bad loan buybacks to close the doors on many small mortgage operations. The lending houses suffered billions of dollars of losses repurchasing loans from Fannie and Freddie, and began to do the same thing for loans they had purchased from smaller originators.

The small and medium sized mortgage originators that survived created underwriting guidelines and procedures to eliminate the threat of future loan repurchase losses. The answer? The perfect loan file.

It’s no longer necessary to have excellent credit, a big down payment and stable employment with income sufficient to support your debt service to guarantee your loan approval. However, you must have a borrower profile that meets the credit underwriting guidelines for the loan you are requesting. And, more importantly, you have to be able to hard-copy-guideline-document your profile.

Every nook and cranny of your financial life has to be corroborated, double- and triple-checked, and reviewed again before closing. This way, if the originating lender has created a loan file that is exactly consistent with published underwriting guidelines and has documented while adhering to those guidelines, the chances are that your loan will not be subject to repurchase.

Borrowers also need to prepare for processing and underwriting. Processors and underwriters are the people trained and charged with gathering (processors), all of your required-for-approval financial documents, and then approving (underwriters), your loan. You can assume these people are well trained and very experienced, as they are tasked with assembling and approving a high-quality-these-people-will-pay-us-back loan file. But just how do they go about that?

The process begins with the filter – the loan originator (a.k.a loan officer, mortgage consultant, mortgage adviser, etc.) – tasked to match the qualifications of a particular mortgage deal to the appropriate underwriting guidelines. It is the filter’s job to determine if a loan scenario is approvable and to gather the documentation to support that determination. It is here, at the beginning of the approval process, where the deal is made or broken. The rest of the approval process is just papering the file.

The filter determines whether the information provided by the borrower can be validated and documented. This is simple, since most mortgages are approved by automated underwriting engines such as Desktop Underwriter, and the automated approval generates a list of the documents needed to paper the loan file. An underwriter can, at this stage, request additional supporting documentation evidence at their discretion, as not all circumstances neatly fit into the prescribed underwriting box. If the filter creates a loan file with accurate information, then secures the documentation resulting from the automated underwriting findings, the loan will close uneventfully.

So, let’s begin with the pre-approval call. Mortgage pre-approval is typically accomplished with a telephone interview. A prospective borrower calls a mortgage rep (filter), and the questions begin. There will be lots of questions as this critical phase of the process is akin to the discovery period in a trial – you’ll need to disclose everything. Expect to answer queries on what you do for a living, how long you’ve been employed in your current field, and what your salary is. If there is a co-borrower, they will have to answer the same questions.

Every dollar in checking, savings, investments and retirement accounts, also known as assets to close, as well as gifts from relatives and non-profit grants, has to be accounted for. Essentially everything appearing on a borrower’s asset-radar-screen has to be documented and explained.

If you were previously a homeowner and sold your home in a short sale, or if you own a home now and plan to keep it as an investment or rental property, there are new and specific underwriting guidelines created just for you. In these cases, full disclosure of your credit and homeownership past can potentially eliminate unforeseen mortgage approval woes. For instance, Fannie Mae has a new underwriting guideline called “Buy-and-Bail,” for current homeowners’ planning on keeping their existing home as an investment/rental property. Properties not meeting the 30% equity test for “Buy-and-Bail” result in additional asset requirements to purchase a new home. Buyers with a short sale history may have to wait two to three years before they are eligible for mortgage financing again. Full vetting of your previous mortgage life will save you the dreaded we-have-a-problem call from your mortgage lender.

It all comes down to your proof. If the lender asks for a specific document, give them exactly what they are asking for, not what “should be OK,” – because it won’t be.  This is where the approval process tends to go off the rails, when the lender asks for specific documentation and the borrower supplies something else. Here, too, is where both sides get frustrated. So if the lender asks for a bank statement and there are 5 pages for that bank statement, send them all 5 pages, and not just the summary. If you send them the summary page and they ask again, don’t complain that the lender keeps asking for the same thing when you never sent it in the first place. This may sound elementary, but the vast majority of mortgage approval process woes stem from scenarios just like this.

The reason the mortgage approval process is now so rigorous is simple. Avoiding defaults and loan buybacks has become the primary goal of mortgage lenders.   Higher standards are reducing loan defaults, which should mean fewer foreclosures in the future. Government data shows that less than 2% of loans originated in 2009, that were resold to Freddie Mac and Fannie Mae went into default after 18 months, down from more than 22% default rates for 2007 loans.

So when your lender requests specific documents from you, give it to them just “because they said so.”

You can thank my dad for that.

Avoiding Another Housing Crisis

Avoiding Another Housing Crisis
About seven years have passes sine the big housing bubble burst and we learned the dangers of loose credit underwriting and over relaxed lending standards. Now, federal regulators are easing away from the stringent guidelines call for by the Dodd-Frank Act of 2010. The underlining purpose was to raise the quality of the “prime” mortgages that are pooled into mortgage backed securities sold to investors.
In 2011, under pressure to increase home sales regulators agreed to a debt-to-income limit as high as 43%. The belief was that lower underwriting standards would encourage homeownership and make mortgages more affordable. But the results are just the opposite.
During the late ’80s and early ’90s down payments were 10-20% and homeownership reached 64% (about where it is now) and 90% of the housing markets were considered affordable (home prices equaled 3x family income).
By 2011 only 50% of homes were considered affordable and by 2014 that percentage dropped to just 36% – even though down payments were as low as 5%.
NOTE: With a downpayment of 10%, a potential home buyer with $10,000 can purchase a $100,000 home. Drop that downpayment to 5% and the same buyer can purchase a $200,000 home. The result housing prices were driven up making most houses less affordable for low and moderate-income homebuyers and inducing these homebuyers to take greater risks.
Prior to the 1990s housing was more affordable because the housing market was not tax subsidized. Builders responded by building smaller homes with fewer amenities. First-time buyers could live in one of these “starter home” for a few years then sell and move up.
Interestingly, Representative Barney Frank — the Massachusetts Democrat who led the House Financial Services Committee during the crisis, and a champion of credit programs for low-income buyers — later admitted, “It was a great mistake to push lower-income people into housing they couldn’t afford and couldn’t really handle once they had it.”
Washington and Wall Street should proceed with great caution as they move toward a new housing/financing environment and take in the lessons of the past.

Reference..Economic Focus