Palos Verdes Real Estate Blog

Palos Verdes homes owners and home owners across the country often have unresolved questions regarding their home mortgage, private mortgage insurance escrow account, promised interest rate reduction, loan modification request and an array of other home loan questions.  I just read about a new federal service that became available on December 1, 2011 – the Consumer Financial Protection Bureau’s home mortgage complaint and dispute resolution hotline courtesy of last year’s Dodd-Frank financial reform legislation.

According to an LA Times article by Kenneth R. Harney,  “The complaint hotline is accessible online at www.consumerfinance.gov and by toll-free phone between 8 a.m. and 8 p.m. Eastern at (855) 411-2372.”  It also is a hotline/website for credit card disputes – there is a separate portal once you enter the site.  This is great for consumers to have another avenue to assist them with these financial disputes.  Click here to read entire LA Times story.

Photo courtesy of Arvin Design

Last week Congress approved raising the loan limits on FHA loans to $729,750.  How will that effect Palos Verdes homes owners?  At first glance, one would guess that there is not too much Palos Verdes real estate selling in the lower ranges.  Currently, 25% or 51 single family Palos Verdes houses are for sale for less than $1,000,000.  However, 46 out of the 47 Palos Verdes condos/townhomes currently for sale are under $1,000,000.

FHA mortgages require lower FICO scores than a conventional loan – 620 for FHA and 660 for conventional.  FHA mortgages require less down payment – a minimum of 3.5% versus 20% for a conventional loan.  This is attractive for some buyers and therefore helpful for some sellers of Palos Verdes real estate.  The downside for buyers is that FHA requires PMI (private mortgage insurance) which is an additional payment on top of the mortgage payment – 1.15% of the loan amount.

Kenneth R. Harney wrote a recent article in the LA Times with some wise advice, “Bottom line for house shoppers: Take a hard, close look at FHA with a local loan officer, in light of the rule changes.  Pencil out the costs, down-payment requirements and more generous standards on credit.”  Click here to read his article.

Fun wintery photo courtesy of Arvin Design

When a seller of Palos Verdes real estate and the buyer who submits an offer on a Palos Verdes home are waiting for the appraisal to come in, they generally presume that an appraisal expert from the area will be doing that appraisal.  That is not always true.  I have written several articles regarding the frustration resulting from the appraisal process (the most recent can be accessed by clicking here) created by the Dodd-Frank financial reform law last year.

In order to separate the potentially biased lender from the appraiser, a new layer was created – Appraisal Management Companies.  The LA Times printed a recent article by Kenneth R. Harney entitled, “Who’s getting appraisal fees?” which gets to the root of the issue.  The issue is that the appraisal management companies (some of which are owned by or affiliated with the lenders themselves) are  keeping as much as half the appraisal fee and offering the appraiser the other half.  According to Harney, “Most experienced independent appraisers refuse to work for $200 to $250 because they can’t pay their overhead at these rates.  Less-experienced appraisers, who sometimes have to travel long distances from their home markets, tend to be more willing to work for the lower amounts.”

This does not only affect buyers and sellers but current owners of Palos Verdes houses who are refinancing.  What can be done?  Some appraisal groups are lobbying to get this changed.  Harney has a great suggestion, “But in the meantime, consumers should demand transparency:  Of my $500 appraisal fee, who got what? And why?”

My clients purchasing Palos Verdes real estate are told by their lender not to apply for additional credit or open new accounts when they purchase a Palos Verdes home  and have a loan (or even a refi) being processed.  I can’t tell you how many times the borower forgets.  They are planning to redecorate their new home, one client needed a new car as her car died, etc.  It can be any number of reasons.  However the new lender now runs a credit check just before the loan (and house) closes.  If there is additional outstanding loans or credit, that may negatively affect the borrower’s ratios and put a hold on the new loan.

Kenneth R. Harney has written an excellent article in the LA Times warning about this very issue.  “If inquiries pop up on your files during this time, lenders must check them out to determine whether any new debt might require a re-underwriting of the originally quoted terms.”  That is just what you want to avoid.  Harney goes on to explain that lenders are even looking back 120 days before you applied for the loan looking for credit inquiries to make sure that there are not any new loans that have not been picked up by the 3 major credit reporting services. 

Harney’s cautionary advice should be heeded, “Be aware that your credit files -  not just your FICO scores – are probably being checked, rechecked and evaluated for the third of a year preceding a mortgage application and two to three months prior to the closing.  The cleaner and simpler you keep the files, the easier your path to an on-time closing should be.”  To read his entire article, click here.

Owners of Palos Verdes real estate take advantage of the mortgage interest deduction to help offset their higher mortgage payments which is a result of the higher home prices in Palos Verdes.  More than one client has been watching the federal governments discussions about the possibility of eliminating/reducing this deduction.

“Deduction’s deficit effect lowered – Homeowners are likely to write off less mortgage interest on taxes than anticipated” was the headline in a recent LA Times article by Kenneth R. Harney.  The article goes on to state that according to a new report by the non-partisan Joint Committee on Taxation, the mortgage interest deduction will not be decreasing revenue by as much as originally estimated:  “$88 billion less in revenue losses are now projected over the next three fiscal years – than the committee estimated early in 2010.”

There are several reasons for this reduction.  Interest rates are at record lows and many existing homeowners have refinanced their mortgages to take advantage of the lower rates.  Home prices are down resulting in lower purchase prices and smaller mortgages.  There is also some repayment of the first-time home buyer credit programs.  Let’s hope that this new report will make the mortgage interest deduction “less vulnerable to attack”.  Click here to read the entire LA Times article.

Owners of Palos Verdes real estate as well as the rest of the country are going to be hit with additional loan fees from Fannie Mae later this Spring when they purchase or refinance a home.  Freddie Mac started charging these fees before Thanksgiving.  According to a recent LA Times article by Kenneth R. Harney, these two organizations “fund or guarantee upward of two-thirds of new mortgage originations.”

Some examples of these new fees are – A buyer with a FICO score over 800 needing a $300,000 loan and less than 25% down would have to pay an additional $750 (an extra quarter of a percentage point).  A buyer with a FICO score of 679 and a down payment of less than 20% will be charged an Add-On Fee equal to 2.75% of the mortgage – for a $300,000 mortgage that would be an additional $8,250!  Condos will be charged an additional 3/4 of a point.  Rental properties and loans with interest only payments will also get separate fees.

The LA Times article goes on to say, “But these fees are just the start of the multilayered, cumulative risk-based pricing system that both Fannie and Freddie employ.  Every perceived risk factor in a loan transaction receives its own separate add-on fee.  Click here to read the entire article.

Palos Verdes homes owners have heard stories or have actually experienced equity credit lines being reduced by financial institutions.  A letter is usually sent to the homeowner explaining that market conditions have dictated this reduction.  For example, a homeowner may have originally had a $60,000 home equity line and now it has been reduced to $35,000; the homeowner has currently used $30,000 of their original credit line.  Most believe that their credit scores are unaffected and that is incorrect.

Let’s go a step further.  Your credit card limit was also reduced from $20,000 to $10,000 and your balance this month (after the Black Friday sales) is $9,000.  You have never been late or missed a payment but suddenly your FICO score has dropped from 750 to 675 which will make it more difficult to get a new mortgage should you want to refinance or purchase a home.  What happened?

Your new ”line limits” were reduced closer to your balances and you are nearer to being maxed out.  According to Kenneth R. Harney in a recent LA Times article, “Credit scoring models typically penalize high utilization rates because they are statistically correlated with future delinquency problems.”  “Not fair,” you say; and I agree with with you – so does the National Association of Realtors which, according to the LA Times article, has demanded that Fair Isaac Corp., creator of the FICO score that dominates the mortgage market, take immediate steps to lessen the negative effects on consumers when banks abruptly cancel or slash credit lines of non delinquent customers.”  With National Association of Realtors lobbying for change, hopefully help is on the way.   Click here to view the LA Times article.

Based on the comments/questions of my clients, many owners of Palos Verdes real estate are indeed refinancing their home loans.  Do you know that interest rates are the lowest they have been since April 1951?  That according to a recent article by Kenneth R. Harney in the LA Times, who goes on to say “30-year fixed mortgage rates (have) been hovering around 4.25%….”  which is really incredible. 

The Federal Reserve recently announced it was going to add another $600 billion to the credit markets which has many homeowners wondering if the interest rates will fall even further.  Kenneth Harney states, ”Amy Crews Cutts, deputy chief economist for mortgage giant Freddi Mac, says the $600 billion might only ‘tweak’ rates downward from current levels.  ‘Four and an eighth is far more likely than 4%’ on 30-year fixed rate loans, she said in an interview, because the Fed ins not buying mortgage-backed securities but rather Treasury bonds.”

If you are thinking of refinancing, now may be the time.  You will want to interview several lenders to determine what kind of loan would be best for you – “no-cost” financing, a standard 30-year loan, a 15-year loan, etc.  Click here to read the entire LA Times article.

Photo courtesy of Arvin Design

Appraisals of Palos Verdes real estate along with real estate in the entire country have been challenging since the Home Valuation Code of Conduct was instituted last year by Fannie Mae and Freddie Mac who have been doing 90% of mortgage lending.  The stated intent of this Code was to keep the appraisal process unbiased and impartial from the lender’s own interest.  That sounded good especially after the financial meltdown but it had an unintended side effect that was created with the newly required appraisal management companies.

On Sunday in a  LA Times article, Kenneth R. Harney asks “..are you as a buyer, seller or refinance applicant certain to be protected against inaccurate valuation produced by appraisers working for low fees who are unfamiliar with your local market?”  Appraisal management companies have been sending out appraisers from out of the area because they are willing to accept the lower appraisal fee sometimes more than 50% less than their usual fee (the management company keeps the rest).  The article goes on to say, “Since experienced appraisers generally refuse to work for such low compensation and rushed delivery demands, many appraisals are assigned to newcomers to the field.  In some cases, critics charge, the jobs go to inexperienced appraisers who are willing to travel far beyond their home markets to get the assignment.”

With the passage of the new Wall Street Reform and Consumer Protection Act in July, replacement rules were to be isssued and will take interim effect in December and finalized in the Spring.  Will this be a change for the better?  We will have to wait and see.  The initial reaction has been “no change”.  Let’s hope more attention will be given to this matter.  Please click here to view entire LA Times article.

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.