Monthly Archive: June 2012

Jun 28

Condo Approvals Not Required

Why is it Hard to Finance a Condo?

Financing a condo has always been tricky. In the last few years it has become almost impossible. Conventional and FHA guidelines have both changed the approval process to get a condo community approved. The irony based on my personal experience is that all of my loan applications in the last year from people buying or trying to refinance a condo is that they all had top-tier credit profiles. If I separated all of my applicants based on the type of property without question those attempting to finance a condo were by far better credit candidates, not even a close call.

So if this is true with other loan officers why is it so difficult to get a condo community approved for a traditional mortgage? The answer lays in the mortgage guideline changes I mentioned above. 

First let’s look at FHA. For as long as I can remember once a condo was FHA approved it was good to go, the approval never expired. That changed drastically last year, now all FHA condo approvals must be renewed every two years. That means someone local associated with the property must fill out paperwork, gather documents, figure out some ratios and then send all of this junk to FHA and do it every 24 months. By the time you finish one cycle it is almost time to start getting ready for the next review.

Second, the conventional review process can go two directions; one covers the entire development and makes the approval status available to any lender and the other is lender specific. The full-blown approval process is very expensive therefore seldom used in our area. The second method is  CPM which I believe stands for Condo Project Manager and it is basically free or I should say lender funded in most cases. CPM is preferred by the consumer or the Home Owner’s Association because it is free. But it is a constant source of trouble because every unit and every mortgage application requires running CPM. What a pain.

The third problem is most board members serving on their Home Owner’s Association are doing so voluntarily. They are just normal people like you and me but are trying to manage their community. Few, if any, have experience managing a multi-family project. Well-meaning attempts to balance a large budget can cause the best run HOA’s to pass by-laws that will cause their property to wash out of the mortgage approval process. One wrong answer during the CPM process will cause a property to be declined.

A Solid Solution for Some Condos

I had calls last week by board members from two different communities asking for help sorting out the mystery of financing a condo. For a year I have predicted that new developments will shift away from being condos to fee simple title similar to row houses in Boston or Chicago. The new communities could still have HOA’s for taking care of common elements like a club house, pools, sidewalks, etc. The difference is in how title is held, my idea is for the owners to actually own the land under their unit instead of just owning the interior of their unit. Of course this requires no upper units, only one unit to a footprint.

So while brainstorming with one board member I asked if their community had any upper units, nope, all ground level. But no one could get approved for traditional financing, FHA or conventional. So I tossed out the idea of not being a condo, Un-Condo is what we decided to call it.

This solution is something they had not thought of but I thought it was a resolution to their problem. If their community is not a condominium development is does not need a condo approval to get financing for a unit. No condo, no condo approval needed.

I was a zoning commissioner in a previous life so looking at development ideas and preliminary plans is nothing new. But it is always a good idea to bounce a new idea off someone you trust. I tossed it out to a couple of other loan officer and they gave it thumbs up. Next I ran it past another mortgage banker and got another thumbs up.

Next stop was legal, ran it past a couple of attorneys that are experts in mortgage matters. Not only did they agree but one said a recent law in Kentucky addresses this very subject,

I read the Kentucky Statute and not only does it tell how to do it, but it says the move does not require a unanimous vote.  Only 80% of the home owners need to vote for the proposition to make it happen.

This post is continued here.

Jun 23

Overpriced Listings

Twice this week I ran across buyers that were attempting to purchase properties that were obviously overpriced. Declining property values have been a growing problem for everyone in the industry for the last few years.  Issues with appraisals run neck-and-neck with problems regarding the condition of the properties. 

The reduction in property values created an almost cottage industry called short sales.  Short sales have been around for as long as there have been mortgages but they have never been as main stream as they are today.  Lenders and the real estate industry were not prepared for the magnitude of the problem.  They have been playing catch up from the very beginning.  

A short sale is what happens when the value of the property is less than the balance of the mortgage and the seller asks the lender to accept less than is owed so the property can be sold.   Explaining this to a seller is not an easy task for a Realtor.  The idea that real estate is the best investment because “They don’t make any more of it” is hard wired in to all of us. 

Not all overpriced listings are an attempt to avoid a short sale, in fact most are simply an indication of greed.  The seller just wants more than the property is worth.

The rules for lending are very specific regarding the value of the real estate being pledged for a mortgage.  The lender must use the lower of the sale price or appraised value when computing the loan-to-value for the mortgage.  This doesn’t mean the buyer cannot pay more for the property than it will appraise for, it simply means they cannot use the inflated price for calculating the size of the mortgage.

How Mortgage Amounts Are Calculated

Let’s assume a property priced at $110,000 but will appraise for only $100,000.  On a standard conventional fixed rate mortgage the minimum down payment is 5%.  Okay, that is the flip side of saying the maximum loan amount is 95%.  But the definition is 95% of the sale price or the appraised value whichever is less.  If the property only appraised for $100,000 then the maximum mortgage is $95,000.  The buyer could still purchase the property for $110,000 but the amount needed for down payment would be the difference between that figure and the maximum loan amount which works out to be $15,000.  

If the property had appraised for $110,000 then the required down payment in our example would have been $5,500, a far cry from $15,000.  This is the primary reason most properties that are priced above the market value will not be sold at the inflated price. 

Some Realtors Will Take a Listing at Any Price

Listings are inventory and the more inventory a Realtor has the more inquiries they will receive from buyers.  Some Realtors will list a home at any price while others will not.  It is a numbers game for those who choose to ignore the comparable sales.  If a buyer calls about a Realtor’s overpriced listing the agent may be able to sell them another home that is not overpriced.  Although there is nothing illegal about taking an overpriced listing it doesn’t help the owner of the property or the marketplace only the Realtor taking the listing.  

The seller is hoping for a miracle, somehow their property will sell for a significant amount above what similar properties are selling for.  Even if they are lucky enough to find a buyer that loves the property a problem will occur when the buyer applies for a mortgage.  Okay, the seller hopes a cash buyer will step up that doesn’t need a mortgage.  Possible, but cash buyers think they are special because they are paying all cash and therefore deserve a bargain, not compatible with the seller’s plan.   

What Can a Buyer Do?

This article began because a couple of buyers asked what to do because they found a property they liked but the price was significantly above the market value.  There is actually a fair solution when you receive a counter offer from the seller that is higher than what you believe is the actual value.  Accept the seller’s counter offer provided the seller or the listing Realtor pays the buyer’s lender for the appraisal upfront.  

Oh man!  Can I kick a hornet’s nest or what?  Ask the seller’s Realtor to pay for the buyer’s appraisal?  You must admit that is out of the box thinking.  Leave it up to the selling side, let them decide who is going to pay it, or maybe they split the cost, it doesn’t matter to the buyer.  This little maneuver will at least initiate a serious dialogue between the seller and the listing Realtor about the true value of the property.

I had to toss the listing Realtor into the mix because the problem never would have surfaced in the first place if they had not listed the property for more than it was worth.    

The clause would also indicate that in the event the property does not appraise for the agreed upon price the seller will have the option to lower the price to the appraised value or release the buyer from the contract.  This solution protects both sides; the buyer is not forking out money for the appraisal on an overpriced property yet both parties have the possibility of discovering how much the property will appraise for.  Win, win.   

Please share this article with others if you like out of the box thinking.

 

Jun 22

FHA Reverses Recent Changes

June 15th 2012, FHA issued Mortgagee Letter 2012-10 that rescinds two changes outlined back in February in Mortgagee Letter 2012-3.  Both of the sections covered in this month’s letter refer to issues on the borrower’s credit report.  The first item covers how to address disputed accounts and the other one covers collections and judgments.

A disputed account is when an individual submits a formal complaint with one or more of the credit repositories claiming information on their credit report is inaccurate.  In other words they dispute the information.  This tactic is most commonly used in an attempt to remove negative information, such as late payments or collections.  Any third grader would know it is wrong to tell a lie and their parents should know that doing so in order to get a mortgage loan approved is a felony offence.   

An open disputed account is a red flag for any DE underwriter.  In February FHA removed the flexibility underwriters had when they came across a dispute on a credit report.  Basically, any dispute on an account over $1,000 or combination of accounts that totaled over that amount would cause the loan application to be denied. 

I know, if you read the letter it doesn’t say that exactly, but don’t forget I am bilingual, my language of choice is slow southern drawl but am also fluent in mortgage mumbo-jumbo.  Here is how it translates, before February the subject was left up to the underwriter, after that it is only left up to the underwriter if the amount is less than $1,000.     

Actually, I agree with the change that tightened up this loop hole.  Mortgage fraud is serious and it hurts all of us.  Disputing accurate information should not be allowed period unless the borrower has solid evidence like a cancelled check showing the payment was made on time, etc.

Evidently this little change caused quite a ruckus because it has been reverted by the most recent Mortgagee Letter.  I personally believe this is a step in the wrong direction.  I didn’t like removing any discretionary abilities from my underwriters but thought it was the right thing to do for the overall good of the nation.

Here is the gut level truth; people that actually qualify for a mortgage are not in the habit of disputing garbage on their credit report.  Most, not all, but most of the people that have multiple disputes are trying to commit fraud.  The government should not allow it to be easy to do.   So I believe this recent change is a step in the wrong direction.

The second change covered collections and judgments.  In the past the underwriter was able to make a decision on collections, the change in February limited that to collections under $1,000.  Judgments of any size needed to be paid off.  A judgment is simply a collection that has been taken to the next level so I have never understood the logic of ignoring one and not the other.  A large collection could morph into a large judgment and that would always happen when the individual could afford it the least.  I believe that is some kind of financial universal law similar to Murphy ’s Law.

Both of the changes from February have been rescinded which makes it easier to get approved for an FHA mortgage.   

Jun 01

Rate Watch – June 2012

Mortgage Rates improved again this week hitting record lows.  Bad economic news domestic and abroad continued to push mortgage rates down.  The unemployment figures were also bad, jobs added were less than half of what was expected and the unemployment rate increased slightly. Something interesting about the new jobs report, they lowered the numbers for previous months by almost 50,000 and that is a lot of nonexistent jobs that were counted, opps!

I have been hearing for at least a month that home sale are picking up dramatically.  Locally that may be true, I know the mortgage company I work for had a record month for May.  We closed an all-time high for a month, breaking the old monthly record by 4.6 million.  Our previous record was set in September 2010.  By the way, the 4.6 million INCREASE is more than most of our competitors do totally for a month.  We were on the plus side of a 100 million for the month, by far the largest volume of any mortgage company based in Kentucky.

Okay, let’s be honest, we do a lot of things right, but there is a lot less competition too.  I have not had a call from a recruiter since 2008, I have had 3 calls in the last week looking for loan officers.  Volume must be picking up in my area.

I just posted the lowest rate on my application site, be sure to check them out.

How much lower can they go?  Not much, there are cost to bring money to the closing table, the current rates are getting painfully close to the hard dollar cost of raising the money.  How much higher can they go? No limit. 

Remember my first rule on interest rates, Rule #1, What goes up must come down, what goes down must come up.

Every day you do not lock in a low rate is one day closer to a higher rate.