Why Are Lenders Being So Difficult These Days?

I read Ben Bernanke’s most recent speech to the Economic Club of New York with great interest.

He offered three reasons that banks are being so Scroogelike with their money.  I offer these explanation not to excuse the banks, but to encourge you, dear borrower, to not take it personally when your lender requests that you comply with seemingly endless documentation requests.

1.   Some banks are keeping more liquid assets on their books, at the request of regulators.  That reduces cash available to lend.  Analogy:  while you’d love to lend your nephew part of his college tuition, you decide it’s smarter to have a bigger cash cushion in these difficult times.

2.  Banks have already sustained large losses, and don’t know what future regulations will be enacted; they don’t want to take on additional risks until there is more certainty.  Analogy:  you lent your college roommate money to buy her wedding dress but she never paid you back.   So the next time a friend in need calls, you are not exactly in the mood to be  so trusting again.   

3.  Lenders are still having trouble finding a secondary market to securitize the loans already on their books.  Translation:  it’s harder for banks to find fresh money to lend out.  (Bailout money is supposed to help, but that’s different than creating a secondary market, which will be durable and predictable, which bailout money is not!)

To sum up, banks recklessly lent out money that never got paid back, there have been repercussions, and now they are afraid to make foolish mistakes again and lose even more money.  No wonder they are so grouchy!

Does that make you feel any better?

Hope for TIC Loans? With higher limits, maybe.

Just a reminder:  as you know, the Fannie Mae loan limit of $729,750 on a single family residence,  has been extended through December, 2010.   Beyond that, the limts on 2 to 4 units have also been extended as follows:

2 units:  $934,200

3 units:  $1,129,250

4 units:  $1,403,400

You may be hoping that today’s low 30 year fixed rates will reduce your monthly payments on your TIC unit with a simple refinance.   Yes, it would be great to convert to a more predictable 30 year fixed rate loan while you wait another year for a more favorable lottery.  

But don’t get too excited.  Some owners will benefit by the change, but most won’t, not unless they purchased their unit long ago or with a sizeable down payment.  

Under the extended guidelines, the maximum loan to value on a 2 unit building is 80%, but on a 3 to 4 unit building, it’s only 75%.  Translation:  if you purchased your TIC interest within the past tive years with 10% down, it’s unlikely your loan to value is now low enough to take advantage of a 30 year fixed rate loan.   Secondly, if you obtained an interest ony loan, even if you have the equity (a low enough loan-to-value ratio), you probably won’t like the payment jump from the interest only payment to the fully amortized payment. 

Feel free to contact me if you’d like me to run a scenarios for you to see if refinancing will make sense under the extended loan limits.

Please note:  The same limits apply for FHA loans, but FHA does not allow property owners to hold title as Tenants in Common, so the limit does not help TIC’s.

 

How to Receive the Tax Credit In A Hurry

Those who qualify for HR 3548 (the Worker, Homeowner and Business Assistance Act of 2009), will be pleased to know that they can receive their tax credit quickly.  Let’s say you buy a home in March 2010:  must you wait until filing your 2010 tax return in April 2011 in order to receive the tax credit?  The answer is no.  You can accelerate the credit by claiming it on your 2009 tax return which you will file in April, 2010.  Obviously, if you purchase the home after April 15, 2010, you will need to wait until the following year to receive your credit.  This is according to John Roth, a senior tax analyst with CCH.

$8,000 First Time Buyer Tax Credit Extended and Expanded!

The $8,000 first time buyer tax credit was was set to expire on November 30 of this year, which caused anxiety to many in our industry.   Supporters of the credit believe it has accomplished the goal of stabilizing the housing market.  (Yes, we have finally come to a point where the government actually has to pay people to buy homes; obviously that’s a far cry from the days of multiple offers, skyrocketing prices, and arrogant sellers.)  

The tax credit as previously written did not have a huge impact in San Francisco because most homebuyers here earned too much money to qualify.  However, under the new guidelines, a single person can make up to $125,000 in adjusted gross income and a married couple can earn up to $225,000 and still qualify for for the credit.  In San Francisco, that works!  The maximum credit a single person can receive is $4,000, and the married couple, $8,000.  The credit is based on 10% of the purchase price; thus, the property cannot cost more than $800,000.  Even singles earning up to $145,000 and couples up to $245,000 can receive a partial credit. 

A first time buyer is defined as someone who has not owned a primary residence in the past three years.

The credit has also been expanded beyond first time buyers to include move-up buyers.  As long as they owned their previous residence for five continuous years in the past eight years, they qualify for the credit, which is capped at $6,500 for married couples and $3,250 for singles.

The tax credit is in effect on contracts written before April 30, 2010, as long as they close by June 30, 2010.  

The Senate has paired this bill with the unemployment extension bill and it’s still unknown how soon the issue will be up for a vote.

Good News for SF Real Estate: Fannie Mae Loan Limit of $729,570 Extended!

Over the past months, I have told clients not to worry too much about losing a government program that has greatly helped our San Francisco housing market,  namely the “temporary” Fannie Mae/Freddie Mac/FHA loan ceiling of $729,750.  Industry insiders expected the limit would be extended, and only one of our lenders (Suntrust) was warning us to submit loans over $625,500 by a certain date.  We thus felt pretty confident that the increased limits would be extended.

Without the increase, Fannie/Freddie/FHA loans here would have been capped at $625,500, which is still higher than the $417,000 that applies to most of the country, but not enough to help buyers looking in the $700k to $1M price range.  

Yesterday, we learned that legislation was approved by both houses of Congress to extend the “temporary” limits to December 31, 2010.  I certainly breathed a sign of relief when I heard the news.  In fact, I was in a room full of realtors and I waved my cell phone around while announcing the good news.

This news is not only good for buyers, it’s good for sellers, too because it increases the pool of available buyers and helps move inventory along which in turn will stablize our market.

We are still waiting to hear whether the $8,000 tax credit will be extended.

The State of TIC’s in 2009/2010 According to Andy Sirkin

I attended a seminar by attorney Andy Sirkin today in which he updated us on the latest and greatest in “TIC Country” as he called it.  Some highlights:

1.  The best financing right now is offered by group — not fractional — loans.  Many people don’t know that fractional loans are offered only by commercial lenders and right now the whole commercial lending world is in the tank.

2.  Andy defined for us the four areas where it will be impossible or nearly impossible to convert a building if a protected tenant has ever been evicted for other than just cause (i.e., the eviction was due to owner move in, gut rehab, etc. and NOT for non-payment of rent.)  In general, if a protected tenant has been evicted after May 2005, the building can never be converted.  Period.  If such an event happened after 2000, the process will be nearly impossible, and when Andy says something is nearly impossible, that means it really is impossible!

3.  He also updated us on how the lotteries have been going. Generally, if a group has been in the lottery for at least 7 years, they will end up in Pool A and have about a 90% chance of success the next time they enter.  If they end up in Pool B (which means everyone who has been in less than 7 lotteries), their annual chance is less than 2%, and that chance wil decrease each year, as the pool gets a little bigger each year.  TIC purchases were prolific in 2004-2007, and the City will be working through that group for years to come.

4.  We also received an update on the TIC conversion process overall.  The process now takes about 4 months, inspections can be started even while occupancy is being established, and costs are about $20,000 exclusive of the actual construction work that needs to be performed.

What If I Don’t Qualify for the New TIC Conversion Loan?

These tough economic times are hitting TICs just like every other type of property.  Many TIC buyers between 2003 and 2007 purchased their building with an 80% first mortgage and a 10% equity line or second mortgage, and now find their equity position of 10% is in grave jeopardy because their building has lost value.

Another problem TIC owners can face is an unexpected job loss and all the problems that go with that.  Even if the TIC partner is able to pay the monthly payments from savings, job loss can cause real problems when there is a need for the rest of the group to move on to complete the conversion or simply to take advantage of a lower interest rate.

As a TIC mortgage specialist, I am often asked, “What if my condo conversion is complete and I’m now ready to refinance into a separate condo loan, but one of my partners has lost his job?  What happens?  Do I need to wait until my TIC partner gets another job?”

According to TIC attorney Andrew Sirkin, the answer is “no”.  Under most TIC agreements, any one of the TIC partners can force a sale simply be declaring (in writing) that they plan to refinance.  If the other partners are unable to participate in a new group loan, they must sell.  The same applies if one TIC partner wishes or needs to sell his unit; by declaring her intention in writing, and setting forth a timeline (“I will be selling my unit within 6 months”), the other owners will also be forced to sell if they cannot qualify to participate in a new loan with a new buyer.

Yes, this is a horrible result for the party who lost his job and now may face losing his home.  If the parties have enjoyed a good relationship in the past, one would hope something less harsh could be worked out.

If you are faced with this situation, please be sure to check your TIC agreement for details.

The DALP Program Has Been Eviscerated!

We just received notice from the City that the DALP program is running low on funds and has been modified to “preserve” those funds.  While well-intentioned, it’s my opinion that the changes made by the MOH are wrong-headed and have made the program completely unworkable.  

First, the City has lowered the income limits — from $81,300 for a single person down to $67,750, and a drop from $92,950 for a couple to $77,450. Right off the bat, that erases about $90,000 in purchasing power.  That’s right; I just ran the numbers, and, all else being equal, someone earning $81,300 could qualify to purchase a home for $490,000, but someone earning only $67,750 could qualify to purchase home for only $400,000.

Second, the City has dropped the maximum loan from $150,000 to $60,000; say goodbye to another $90,000 in purchasing power. 

Bye bye.

Third — and this is the worst change — loans will only be given to those purchasing REO’s or short sales.  That’s right, absolutely no down payment assistance from the City unless the property is bank owned or in foreclosure.

On its face, the City’s reasoning seems sound.  The memo we received from Myrna Melgar, Director of Homeownership Programs for the Mayor’s Office of Housing states, “The down payment assistance program has played a crucial role in stabilizing neighborhoods most deeply affected by the foreclosure crisis, with over half of our funds going to households purchasing short sales or foreclosures.  MOH is therefore restricting limited funds to stabilize those communities with the greatest need.”

Now think about it:  is the City saying that the only way people will buy bargain-priced homes in the more marginal neighborhoods is if they receive a helping hand from City coffers?  This defies the reality that real estate agents face every day:  there is always a vibrant market for starter homes in starter neighborhoods at starter prices.  Even when starter home were priced at $750,000, there was an active (and crazy!) market for them.  

And it’s only recently that much of the starter home inventory has finally been sold off and prices are stabilizing.  But those sales would have been made even without the DALP program. 

Winding up 2009, now that supplies are lower, demand is high again for starter homes.  There will be no problem selling off the REO’s and foreclosures with or without the DALP program.  Those homes will either be bought up by worthy first-time buyers or by investors who  will fix them up and sell them to worthy first-time buyers, but they will be sold and the impacted neighborhoods will be stabilized.

I recently interviewed Charlotte Erwin at Zephyr Real Estate who said, “Those changes just don’t reflect reality.  Short sales and foreclosures are the hardest deals to close, and only about 20% actually end up closing.  I have clients who have done all their homework, have taken the DALP classes, and who will now be crushed that they are now supposed to try to hit a nearly impossible target.  These changes are not likely to result in a positive outcome for my clients.”

I think the fairest thing the DALP people could have done was stick to a “first come, first served” program.  First-time buyers can understand that a program has run out of funds, but they cannot understand why the City would eviscerate a program with no good reason.