We spoke (complained), and were heard.  Fannie Mae told lenders on June 30, 2010,  that they “prohibit lenders from changing appraisals” according to a LA Times article yesterday (click here for full story).  This is good news for owners of Palos Verdes real estate and buyers also. 

Here is what has been happening since the new May 2009 Guidelines.  Lenders have been ordering appraisals from Management Companies who sometimes choose an appraiser from out of the area who may have only “minimal access to local realty data” and the appraisal comes in low.  Additionally, “Lenders unilaterally may be lowering the numbers on the appraisals submitted to them to avoid accusations that the loans they sell to giant investors Fannie Mae or Freddie Mac are based on inflated appraisals.  Such value inflations can expose lenders to ‘buyback’ demands, forcing them to repurchase loans at huge costs,” according to Kenneth R. Harney in his LA Times article.

As of September 1, 2010, the LA Times article goes on to say,  “lenders must contact appraisers to resolve any disagreements about the valuation.  If that’s not possible, they should order a second appraisal – not just chop the value supporting the real estate contract.”  Finally, the voice of reason.

Photo courtesy of Arvin Design

Buyers of Palos Verdes homes often ask what a loan point is.  My clients who are refinancing also have the same question.  Here is a very concise explanation provided by a Bank of America loan officer:

What exactly are “points”?  What tax benefits accrue from “points”?  What is the “APR” and in what ways is it important?  And what are the benefits to home sellers who may consider paying a buyer’s “points”?  We look at the basics here, urging you to take your specific questions to your tax advisor, while hoping to help you better formulate those questions.

Traditionally, a “percent” is often expressed as one or more “points.”  Thus, if you pay two percent of the loan amount to originate a loan, you are paying two “points.”  It realy isn’t any more exotic than that.

If the loan is a mortgage, the total origination fee will be a combination of points and fees for services, like the appraisal fee, the escrow fee, the recording fee, and other costs.  If the mortgage is for the purpose of buying a home, known as a “purchase money loan,” then the points are deductible on your tax return for the year in which the home was purchased.  The other fees are not deductible.

Further, points paid on a refinanced mortgage are not fully deductible in the year of the transaction.  Instead, the deduction is spread (or amortized) equally over the full life of the loan.

This raises an important question.  What happens when you refinance a mortgage that has already been refinanced; that is, what happens when you refinance a second or third time?  The points paid for the prior refinanced loan become deductible in the year of the newly refinanced loan.

Points are considered prepaid interest.  They are one part of the overall interest you pay on your loan.  That is why we can deduct them against our ordinary income on our personal tax returns (remembering that the deduction schedule is different, depending on whether the loan is a new purchase money mortgage or a refinanced loan).

Understanding what points actually are and the basics of how they work can open up a world of possiblities.  Consider this: if the stated interest rate on a mortgage is surprisingly low, the lower interest rate may often be counter balanced by higher points.  Thus, one loan may bear an interest rate of 5.5% and another 5.625%.  The first loan obviously looks better than the second – until you look closely at the origination points.  Often the first loan requires slightly higher points, and the difference in the life-of-loan interest costs for each loan could be minimal as a result.

In order to make certain that consumers are aware of the expense that higher points can add to a loan, the government long ago required lenders to provide an “APR” calculation on loan settlement papers.  The Annual Percentage Rate (APR) blends the interest cost of the points and other fees into the potential life-of-loan interest payment, and then provides a new, “adjusted” interest rate that takes into consideration the loan points and associated fees.  This sounds confusing because, frankly, it is.  At best, it provides a way of comparing two loans and seeing which will cost more in the long run.

What makes far more sense is the fact that you can often pay higher points in order to pay down your loan’s interest rate, and make your monthly payment smaller.  You will want to discuss such possibilities with your Mortgage Loan Officer, tax advisor and financial advisor.  You may also want to look at the life-of-loan savings you can create with an accelerated pay-down of your mortgage, adding to each month’s principal payment and thus, if it is a fixed-rate loan, decreasing both the number of years in which you make loan payments or, if it is an adjustable rate mortgage, potentially lowering the monthly payment when the loan adjusts.  In either case, you an lower the life-of-loan interest that you pay.  (Keep in mind that an amortization schedule simply adjusts each payment so that is pays all of the interest owed on the loan balance if paid in monthly payments.  Lower the loan balance by making larger payments to the principal balance of the loan, and you will owe, and pay less interest towards the principal.)

Also worthy of discussion, when you are selling your home, is the possibility of helping the buyer by paying the points on his or her purchase money loan.  Not only is the seller allowed to do this, but the tax deduction for those points can be taken by the homebuyer, which provides a large value incentive for them.  The home not only meets the home buyer’s needs, it also costs less to purchase and decreases the buyer’s tax liability.  Again, be sure to discuss these options with your tax and financial advisors.

Remax Palos Verdes/Execs has formed a new alliance with Bank of America which will benefit our clients in several ways.  We now have access to the largest lender in the jumbo market.  Bank of America will loan 80% up to a $2,000,000 loan to qualifying borrowers.  This will help buyers (and therefore sellers) of Palos Verdes real estate.   Remax Palos Verdes/Execs clients will be given priority and our agents will be given a source code so that we can track the loan through all stages.

We have a local Legacy Bank of America office which has their own loan processing center and underwriting department.  This is very beneficial as a local person is making a decision about a local property which means the file won’t be “rubber stamped” but given personal attention based on our local market.  No more dealing with a loan center half way across the country.  And our clients are promised a better loan rate!

The current rate for a 30-year fixed conforming loan (up to $417,000) is 4.625%;  a jumbo conforming loan ($417,000 to $729,750) is 4.75%; and for a jumbo loan to $1,500,000 the rate is 5.5%.

In the last six weeks interest rates for Palos Verdes real estate have remained fairly steady. The interest rate for a 30-year fixed mortgage going down 1/4 point to 4.75% for a conforming loan and remaining at 5.785% for a jumbo loan. A 5/1 Year ARM is 3.75% for a conforming loan and 5.125% for jumbo loans. A 5/1 Interest Only conforming loan has a 3.75% interest rate and a jumbo loan has a 5.25% interest rate.

Demand is up for U.S. Treasury Bonds. Yesterday there was 3 times as much demand compared to supply for sales of 2-year Treasury notes (investors bidding at 1.035%) . Interest rates for home mortgages have remained low. Conventional wisdom says that when bond rates go up, interest rates usually go down but at this time both are fairly low which is a mixed signal. These are interesting times.

It was a fairly quiet week in the financial/mortgage area which is a welcome change from the last several months.

Rates are down slightly for all loans. The current interest rate for a 30-year fixed conforming loan is 5% and 5.875% for a jumbo loan. A 5/1 Year ARM is 3.625% for conforming loans and 5.125% for jumbo loans. A 5/1 Interest Only conforming loan has a 3.75% interest rate and a jumbo loan has a 5.25% interest rate. Jumbo loans (over $729,750) are down significantly since the beginning of the year.

“The typical monthly mortgage payment for Southern California buyers last month was $1,193, up from $1,052 in May. Adjusted for inflation, current payments are 46% below typical payments in the spring of 1989, the peak of the prior real estate cycle” states the Los Angeles Times on July 16th. I checked and in 1989, the average interest for a 30-year fixed mortgage was 10.32%. That is twice as much as today’s rates!

The current interest rate for a 30-year fixed conforming loan is 5.125% and 5.875% for a jumbo loan. A 5/1 Year ARM is 4% for conforming loans and 5.375% for jumbo loans. A 5/1 Interest Only conforming loan has a 4.125% interest rate and a jumbo loan has a 5.5% interest rate.

Federal Reserve Chairman, Ben Bernanke, commented yesterday that he thought rates were going to remain low. I hope he is correct as these low rates continue to stimulate our real estate market.

I have just earned the prestigious Certified Distressed Property Expert designation having completed extensive training in foreclosure avoidance and short sales. Although we have not experienced many of these sales in Palos Verdes real estate, more are expected in the future. In a nutshell, I learned how to assist homeowners who are either behind in their mortgage payments or are having trouble making those payments identify their options.

I have worked with both buyers and sellers of short sales in the South Bay. A short sale allows a cash-strapped seller to repay the mortgage at the price that the home sells for, even though it is lower than what is owed on the property. More and more lenders are willing to consider short sales because they are much less costly to the bank than foreclosures.

A homeowner cannot just be upside down on his mortgage (owes more than current value of property). A homeowner must show a valid hardship answering the question, “What material change has taken place in my life since I took out this mortgage that precludes me from paying it back?” The single largest reason in today’s market is a payment increase due to a mortgage reset/adjustment. But it might also be a loss of job, death of a spouse, relocation, reduced income or a number of other reasons.

Short sales can be a complicated process as the lender requires specific documentation and an entire package (typically more than 55 pages) must be submitted in its entirety before the lender will even consider the short sale request. The buyer must be very patient as the lender sometimes takes months to respond. Even though short sales are more time consuming, it is rewarding to be able to help sellers save their home from foreclosure.

Mortgage rates have been see-sawing up and down a bit for the Palos Verdes real estate market. A 30-year fixed conforming loan is 4.875% which is a quarter percent higher than 2 months ago and a quarter percent lower than last week. A 5/1 Year ARM is 3.875% and a 5/1 Interest Only loan is 4%.

30-year Fixed Jumbo rates are 6.125% for borrowers with FICO scores over 740 and 30% down. A jumbo 5/1 Year ARM is 5.125% and a 5/1 Interest Only loan is 5.25%.

A mortgage broker I spoke with expects interest rates to continue their up and down cycle through the end of the year as the loan market reacts to the ups and downs of the stock market and consumer confidence.

The availability of Jumbo Loans have affected the sale of Palos Verdes real estateover $1,200,000. It is a little tricky because there are jumbo loans available at rates that match May of 2008 – 6.875%. However, the number of buyers who can qualify for those loans has been diminished because these loans must be have full income verification and the borrower must have FICO scores of 700 or above.

And the higher the purchase price, the larger the down payment required. A loan of less than $1,000,000 requires 20% down. A loan between $1,000,000 and $1,500,000 requires 25% down, A loan of $1,500,000 to $2,000,000 requires 30% down payment. Loans above $2,000,000 require a minimum of 35% down payment.

On a sales price of $2,000,000 with $500,000 down payment where the borrower has no other debt, that buyer will have to document $375,000 yearly income (which is 1% or less of the population) for a loan of $1,500,000. Additionally, the lender will require the borrower to have cash reserves post closing of at least $150,000 and those funds have to have been in the bank account for a minimum of 3 months (Retirement accounts do qualify as cash reserves.) The issue seems to be that probably half of those borrowers who are making $375,000 or above are self employed and write off business expenses to lower their income for income tax purposes. The net income figure on page one of the tax return is what the lenders use as documented income. Jumbo loans are available but fewer borrowers qualify because of the above parameters.

Mortgage rates are down again for the Palos Verdes real estate market. A 30-year fixed conforming loan is 4.625% – That is a record low in Freddie Mac data going back to 1971!

Fixed mortgage rates in the U.S. fell for a second consecutive week as the Federal Reserve plan to buy mortgage-back securities helped drive rates lower. 18 properties on the Palos Verdes Peninsula went into escrow in the last week. I believe Buyers are realizing what a great opportunity this is for them and they are taking advantage of these historically low interest rates.

Above mortgage rates for Palos Verdes homes are provided by Jim Kurata, Peninsula Mortgage/Chase (310-994-2769).