Bill McCord's Blog

An FHA mortgage has not typically been the first thing that came to mind when buying in the Silicon Valley area during the past 25 years or so.

Guess what; with the chaos in the Mortgage Banking industry FHA is now the best program in the market for anyone with less than a 20% down payment looking to buy up to the new conforming limit of $729,500.

With 30 year Fixed and Adjustable programs, as little as 3% down, and generous Seller credit provisions, this is definitely not your Grandfathers FHA Mortgage.

In addition the interest rates are typically better than those offered by the standard Banks, and qualifying parameters are stable and consistent. This can certainly not be said of the rest of the industry.

Does this sound like anyone you know?

1. I’m a smart person with good solid  job. I should own a house.

2. That idiot down the street makes less than I do, but he just bought a cool house. He’s a homeowner!

3. I wonder how much house I can afford?

4. I don’t know much about real estate. It sounds complicated, so I’ll talk to someone who does it for a living.

5. Realtors and mortgage brokers know what they’re talking about! (No conflict of interest there, right?) They tell me to spend as much as possible, because housing prices always go up. I don’t have to even research that; it’s so darn obvious!

6. I’ll take out the biggest mortgage the broker will give me. I’m not worried, because they wouldn’t loan me the money if they didn’t know I could afford it. They’re professionals after all.

7. Everybody else is doing the same thing, so I have to be as aggressive as possible. They’re not making any more land and there’s a shortage of housing (again, it’s so obvious!), so I have to get into a house now or the prices, which never go down, will rise out of reach.

8. I make $100,000 per year, which puts me way above average, some might consider me rich. The median price of a house in my area is $700,000. I don’t care if that’s seven-times my income (the rule of thumb is that your house should cost 3 to 4 times your annual income), I’m a rich guy so I should get an $850,000 house. I deserve it!

9. Cool! I just bought my house. It cost me $928,000. I had to bid aggressively because some other jerks were trying to get it and we really love this house. I got it with an interest only adjustable rate mortgage, because the rates on ARMs are one whole percentage point lower than a fixed-rate mortgage (yes, rates are currently at 40-year lows, but I needed that extra percentage point to make the monthly payment).

10. My interest rate doesn’t reset for 3 years anyway, and I’ll certainly be making more than I am now in five years, (even though on average, people are now making less than they were 5 years ago).

11. The interest-only part of the mortgage also ends in 3 years, so I’ll just refinance the mortgage. The broker told me that should be no problem. (Unless, of course, there’s a massive global credit crunch that causes the biggest tightening of credit since the 1970s, but that won’t happen).

12. I’m a smart person who owns a house. All is right with the world.

13. Honey, some guy has stuck a notice on our door.

The morale is:

WHAT YOU DON’T UNDERSTAND CAN AND WILL COST YOU.

GET EDUCATED.

The Annualized Percentage Rate APR is an economic measurement designed by politicians.

It was intended to provide the mortgage borrower with a simple way to compare the real costs of different mortgages. For example, is the low interest rate high points approach better than the High interest rate lower points? Unfortunately the way it was designed is badly flawed. It not only fails in this primary goal. it also allows the numbers to be manipulated in such a way that the borrower can take the low APR option but end up paying much more for the loan, and losing some tax benefits.

A detailed explanation of the problems with this legistlation would take another couple of pages, but if anyone is really interested drop me an e-mail and I’ll happily give you the gory details.

I’m seeing more and more qualified home buyers holding back from actually buying based on the continueing folk legend that Banks are restricting the release of REO properties to avoid a glut of inventory which would drive prices down. The story is that a huge surge of new REO’s are coming to market in the fall and that will be the time to be a Buyer.

I believe this is total nonsense as the Banks have no sensible reason tho do this, and a very strong financial reason to do the exact opposite.

It has always been my understanding that once an NOD (Step 1 in the actual foreclosure process) is recorded the Bank has an official “Non Performing Asset” which must be excluded from their FDIC required reserves, and must be replaced immediately from other assets. This inevitably reduces the amount available for new lending.

If this is so then the Banks are strongly motivated to get whatever they can, as quickly as they can, for any REO properties they hold. The money recieved can then go back into the “Funds Available for Lending Pool” from where it can be loaned out to create new mortgages i.e. “Performing Assetts”. This is how banks make profits.

Can anyone comment on my understanding of this and offer suggestions on how we can counter this market distorting perception.

Most successful Realtors know the truth of my Title (Paraphrased from ex Speaker of the House of Representatives Tip O’Neill “All politics is local”).

Unfortunately many of our clients get most of their information from the talking heads and empty suits of the mass media whose purpose is to sell advertising, with LITTLE or NO REGARD to TRUTH or CONTEXT.

They are therefore led to believe that any house can be bought for at least 20% less than a year ago, anywhere it happens to be located.

Here are a couple of facts that might be thrown into the running conversations about “How’s the market”

Over the past 10 years the average home price has INCREASED by 6.2% Nationwide.

Over the past 20 years the average home price INCREASE has been 4.7% Nationwide.

Source www.ofheo.gov

These are way below the numbers for Santa Clara County (Silicon Valley) where I live and work, and they are way above the numbers for Dallas Texas.

The Morale is “East San Jose is NOT Palo Alto. Sacramento County is NOT Santa Clara County, Southern California is NOT North California”. Florida statistics are not relevant to any other State.

ALL REAL ESTATE IS LOCAL

These days when every mass media empty suit is competing to see who can spread the most gloom and doom let me point out one very positive outcome of all this, especially for the Real Estate Market.

It’s great for mortgage interest rates. When stock markets go down it’s because a lot of people are selling. Where do you think they put the money received from the sales?

How about the traditional safe haven BONDS? This drives up the prices on Bonds.

When Bond prices go up, interest rates go down. That is exactly what happened yesterday when we saw 2 reductions and modified rate sheets during one day.

If your mortgage was in process you might have received a call late yesterday to discuss locking in the interest rate.

Here in Silicon Valley we are in the middle of the most amazing 1st time Buyer market i’ve seen in my 20 plus years working here.

We have an much higher than normal number of Short Sales and REO properties. While for numerous reasons short sales are just sitting out there, the REO properties are flying off the market as quick as they arrive, and in most cases with multiple offers.

For a great summary on this topic check out Scott Schang’s blog at http://www.californiateachersandemployeeshomeloanprograms.com/buying-homes-in-a-bidding-war-understanding-competitive-markets/

There is little point in going out looking at open houses etc if you don’t know whether you can afford them. Save yourself a lot of time and frustration by getting Pre Approved. This is NOT the same thing as Pre-Qualified.

Pre-approved means you have a written commitment from a chosen Lender stating that your personal financial data has been checked out and your loan is ready to go as soon as you have a contract on a suitable home. Now is the time to get out for some serious house hunting knowing exactly what you can afford.

Pre-qualification is next to useless. This simply means you have given some general information to a Lender who can “honestly” say that providing what you say is true you will be able to get a loan. Until your income, credit, down payment, etc has all been proven you are not really ready to start looking.