Bill McCord's Blog

A small but very welcome glow of sanity from a historically well run Bank.

After acquiring $117.3 billion dollars worth of option adjustable rate mortgages (ARMs) in its acquisition of Wachovia last year, banking giant Wells Fargo is now practicing a rare but effective loan modification strategy: the cramdown.

Through September of this year, Wells Fargo has forgiven an average of $46,000 on approximately 43,500 high-risk loans in its portfolio. The typical debt reduction is around 20% of the loan principal, though in rare cases Wells Fargo has cut as much as 30%. Reports put the six-month default rate of loans modified by Wells Fargo at 15-20%, less than half the current rate of 40% suffered by the rest of industry’s extend-and-pretend modifications.

Debt reduction is only one of many tools Wells Fargo is using to aid its distressed borrowers, and is currently not being used as a blanket fix for all underwater homeowners.

My Opinion: While this is a national story and certainly only a very small slice of the current problem pie, a mortgage lender taking into account the need for principal reduction is a big acknowledgement that the underwater state of many homeowners’ mortgages require this type of treatment. This is something other lenders and Congress need to understand when considering the mortgage quandary. Continuing to “kick the can down the road” with “extend and pretend” modifications will do nothing to solve the massive negative equity problem. The fact that the small glimmers of hope — in the form of cramdowns — are coming from a lender and not the regulators really speaks to the hands-tied, head-buried-in-the-sand mentality which must be overcome if we are to move ahead with a recovery.

Re: Wells Fargo Cuts as Much as 30 Percent in Principal from the Wall Street Journal

The rumours and speculation surrounding this Bill are getting increasingly shrill and uninformed ranging from:

1. Extension of the credit is a done deal and will possibly even increase the amount to $15,000.

2. It will be changed to apply to deals that are in escrow before the current Nov 31st deadline and close within 60 days more.

3. It’s dead as of Nov 31st.

4. Etc, etc,etc.

The best site i’ve found for intelligent discussion of this is http://www.californiateachersandemployeeshomeloanprograms.com/update-8000-homebuyer-tax-credit-extension-october-2009/

Scott is a very diligent researcher and reporter on this and more generally 1st time buyer programs.

At the low end of the Santa Clara and Alameda Counties single family home market ($300-$400k) I’ve got used to having to make multiple offers ror each Buyer before getting a deal

I’ve also noticed this creeping up to the $400-$450k market.

However, until last week there was no sign of the same thing happening at higher price levels in the more “up scale” neighborhoods.

Here’s what just happened just 10 days ago

Fri 9:30 I enter a nice new Cambrian listing for $665,000 and schedule for the following weeks Campbell/Cambrian Broker Tour.

Sat Open House has 35 groups of people through.

Sun Open House had 29 more.

By noon Monday I’d received 3 excellent offers and we had accepted a full price clean one.

Early afternoon I get a call from the organizer of the Brokers Tour telling me that the tour had been canceled as all the scheduled properties had sold over the weekend and I would have been the only property to tour. I was actually sitting at my keyboard to update to a Pending Status, so in fact there were no new listings left to tour.

Is this a onetime situation, or a harbinger of calmer waters coming fast?

If you live in Silicon Valley and are thinking about buying your 1^st house this is probably the best ever time to do so. 

1. Santa Clara County has a new 1st time buyer program which gives a 30 year, $40,000, Down Payment Assistance loan at 2% interest, with no payments required for the 1st 4 years. After 5 years the interest rate becomes ZERO. The maximum total interest over the life of the loan can never exceed $3,200. THIS IS FANTASTIC. 

2. 90% of the Cities in Santa Clara County have one or more special 1^st First Time Buyer programs to help get a foot on the Home Ownership ladder. 

3. Federal Government and the State of California have several different 1^st Time Buyer programs. 

4. Many of these programs can be combined to provide affordable ways for the majority of people who at present believe they can’t afford to buy. 

5. The Santa Clara County Association of Realtors has a new program which will provide 6 monthly payments of up to $1,500 per month for a Home Buyer who loses their job. 

6. The IRS is giving an $8,000 Tax Credit to any 1st time Buyer who buys before Nov 31st this year. This is a CREDIT not an allowance. It means that even if total Fed Tax was $6,000, not only would that be wiped out but you would get an additional $2,000 rebate. That’s an $8,000 gift from Uncle Sam. 

In addition to all this Mortgage Interest Rates remain at historically low levels, while home prices have come down substantially from the peaks of 2007. 

There will never be a better time than this for that 1^st purchase.

Government is often criticized for putting all its efforts into helping business and nothing for the ordinary citizen. However, when they do put programs in place we have a tendency to ignore them.

Here’s just one example:

A 401-K plan usually involves an employee putting up to 6% of their salary into a company sponsored program. Typically the employer increases that contribution by adding in up to 50% of what the employee puts in. (this is increasingly being reduced but is still at least 25% in most cases). This means the employee is getting between 25% and 50% interest on their savings, plus their contribution is exempted from Income Tax for the year it is made.

So how come only 7% of people eligible for this benefit actually use it up to the max allowed? (Source Putnam Investments).

How come 20% of participants in these plans have actually reduced the level of contribution during the past 2 years?

My guess is that a large number of these people would like to maximize the use of these plans but don’t know how it could be done.

I also suspect that a large percentage of them could solve the problem with a mortgage better suited to their circumstances.

It’s all about meeting new people and helping them realize their dreams.

From the 1st meeting to the close of escrow, maybe 3-6 months, you go through the equivalent of 20 years of getting to know people well, and developing the ability to work toward a common goal.

 Then you may do nothing more than exchange xmas cards and sending out occasional marketting info. However, if the result of your initial business experience was positive, you will be hearing from their friends and family.

 Then, about 5 years later you will be renewing close aquaintance helping them with their next move.

There is nothing more gratifying than that phone call regarding new business coming from a past client or a referral from them. That is a FUN call.

I’ve lost count of the number of times I’ve been asked “I see the Fed lowered it’s rate(s) today, www.federalreserve.gov/ how much have mortgage rates dropped by”?

When I answer, as is most often the case, “they’ve not gone down, they’ve gone up”, the response is “how can that be.

So let’s try to explain it once and for all.

First the basics.

There are 3 actors in this story.

1.The Federal Reserve Bank.

2. Mortgage Backed Bonds/Securities.

3. Inflation.

FACT: There is no direct relationship between the Federal Reserve and Mortgage Interest Rates.

FACT: Despite the continued repetition from the Talking Heads in the mainstream media, there is also no direct connection between the 10 year Note and Mortgage Interest Rates. In fact the two will often go in opposite directions after a Fed action.

SUPER FACT: Mortgage Interest Rates are directly affected ONLY by the prices of Mortgage Backed Bonds, commonly referred to as Mortgage Backed Securities. For the most part these are Long Term Bonds issued by FANNIE MAE and FREDDYMAC, and it is their price going up or down which drives Mortgage Interest Rates.

As with all Long Term investments, Bonds are most directly affected by the outlook for Inflation, which makes it likely they will be paid back in the future with inflated dollars. Inflation reduces the current value of all Fixed Investments such as Bonds.

The Golden Rules:

1. Prospects of higher Inflation drive down prices of all Bonds.

2. When Bond prices go down, Mortgage Interest Rates go up, and vice versa.

Here is where the Fed comes in. Drastic lowering of rates by the Federal Reserve Bank will always lead to fears of Inflation and put downward pressure on all Bonds. This is precisely what we have seen since the start of this current lowering cycle.

The sole exception to this is your Home Equity Line of Credit (HELOC) which is usually tied to the Prime Rate. The Prime rate is historically 3% more than  the Fed Funds rate; so in today’s topsy-turvy world you will often  find your Equity Line loan having a lower interest rate than your 1st. Mortgage.

For all Home owners in California above 62 years old, or those with parents in that age group, the State Controllers Office has a program which allows long term postponement of Property Taxes. Go to www.sco.ca.gov and select “Public and Gov, Services” tab, then select “Property Tax Postponement”.

Consider a 68 year old Grandmother living alone in the old family home in North San Jose. All her children and grand children are living in Pleasanton, about 30 minutes freeway driving away. She would love to sell up and move closer to the family, and could afford a suitable house using her sale proceeds. However, the price of the house in Pleasanton would be higher than the sales price of the San Jose house, so thanks to California’s Proposition 13 www.hjta.org/node/320 and the incomplete Propositions 60 and 90, www.boe.ca.gov/proptaxes/faqs/propositions60_90.htm she would not be able to carry her existing Property Tax payment over to the new house. This would increase her Property Taxes by $600 per month. This makes the whole thing impracticable as she cannot afford this extra expense. and her children are unable to subsidize her, even if she would accept it.

Here’s how the numbers work:

Grandma’s house, bought in 1980 for $50,000, is now worth $600,000 and has no mortgage.

Thanks to Prop 13 her property taxes are only $90/month.

The replacement house in Pleasanton will cost $750,000 and she can easilly handle the small mortgage needed.

However, thanks again to Prop 13, her new property taxes will be $781/month. This she cannot manage.

Using the Property Tax Postponement program she is able to make the move and simply allow the accrued Property Taxes to reduce her final estate. A result with which the whole family can be happy.

Many Buyers in my market area (Silicon Valley, CA) will research schools to decide where they want to buy. Unfortunately the Acronym Zoo makes it difficult to actually dig out the truly relevant information. In a small effort to help with this I’ve put together the following basic descriptions of each of the normal acronyms used.

APR (AccountabilityProgress Reporting) is the California State mandated system to measure current performance of schools.

API (Academic Performance Index) is the result of the measurement process and is a unique number for each school.

AYP (Adequate Yearly Progress ) and PI (Program Improvement) reports are the results of a Federally mandated program with a different focus.

API measures the performance and progress of a school based on statewide tests at grades 2 through 12. It produces a numerical rating between 200 and 1,000. Depending on the current rating, each school receives a target for improvement over the following year, expressed as a percentage. The higher the current score the lower the percentage increase required until at 800 the requirement is to maintain that score.

AYP is used to drive and monitor progress toward a common goal for all schools. This goal is that all schools must have 100% of students achieve proficiency in English-language arts, and mathematics by 2014.

To truly understand how to interpret these go to the California Dept of Education site. http://www.cde.ca.gov/ta/ac/ar/ This will give links to details for all these and related systems.

In todays crazy world we all know people who are struggling to get by. Here is information about some sources of help not commonly known about.

There are many free, low cost, discount and income-eligible services offered by government agencies and trusted sources. This link will take you to many of them http://www.takechargeca.ca.gov/campaigns/free.shtml.

You can also obtain this list from the Department of Consumer Affairs at (800) 952-5210. Visit their website for information on a multitude of programs provided by the State for all of us.  www.takeChargeCA.ca.gov 

The list of free and low cost services help California consumers save money!  Want a free or low cost hair cut, or manicure?  Looking for help paying for a Smog Check, or just some basic coupons for household products or food?  It’s all there and much, much, more.