Real estate Newsletter

Lenders Granting More Second Mortgages as Home Values Rise

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Lenders Granting More Second Mortgages as Home Values Rise
An increase in second mortgages reflects major lenders’ growing confidence that the real estate market has finally made the turn to recovery.
By Kenneth R. Harney

WASHINGTON — If you have a pressing need to raise some cash, here’s some good news: Rising home values are encouraging lenders to revive a product that imploded during the housing bust years — second mortgages.

Researchers at Equifax, one of the three national credit bureaus, say total outstanding balances of second home mortgages at banks rose in the latest month for the first time in nearly five years. Though the blip was relatively small — about three-tenths of a percent — analysts say any increase in the amount of second mortgages is a bellwether event, indicating that major lenders are showing growing confidence that the real estate market has finally made the turn to recovery. The Federal Reserve recently reported that American homeowners’ equity stakes rose $406 billion in the second quarter, a 5.9% increase over the previous quarter and the highest it has been since 2008.

Second loans, which include fixed-payment mortgages as well as floating-rate home equity lines of credit, put the bank in second position in the event of a foreclosure. Say you have a house worth $250,000 with a $200,000 first mortgage and a $20,000 second mortgage. The proceeds of any foreclosure would initially be used to pay off the lender in the first position. Any remainder would pay off the holder of the second lien. Because lenders assume a “junior” position when they make a second loan, these mortgages are generally considered to be higher risk and carry higher interest rates and fees than a first.

Second loans can be used for a variety of purposes — paying for kids’ college tuition, injecting capital into a small business, financing a home improvement and paying off credit card debts are among the most popular.

Equifax, which receives information from virtually every major bank and mortgage lender, compiles data on a variety of loan products. In its latest National Consumer Credit Trends study, it found that home equity lending appears to be rebounding fastest in New Mexico and California, where outstanding balances jumped 2.3%, along with Nevada (2.1%), Colorado (2%) and Florida (1.6%).

Increases in equity lending, said Amy Crews Cutts, Equifax’s chief economist, “are really a healthy sign” for the economy overall because in the years after the housing bust, many banks had little confidence that home prices were stable enough to lend against in second position.

Now when Cutts speaks with bankers, she finds them “pretty willing to do [second] loans when their customers need them — they’re much more open” than they’ve been in years. Though underwriting standards are tougher than they once were, banks are lending again, and they are experiencing smaller losses. In the most recent study, Cutts said, second mortgage write-off rates fell to just 2.7%, the lowest they’ve been since February 2008.

Second loans are “an important element” in Bank of America’s “customer relationship strategy,” said Matt Potere, home equity executive for BofA. “We expect growth to occur as market conditions continue to improve.”

James Chessen, chief economist for the American Bankers Assn., agrees. “It’s good news that finally there’s some upward movement” in home equity lending, he said.

But Chessen isn’t yet convinced that this is a long-term trend, in large part because of slow job growth and uncertainty about the economy. Also, notwithstanding Equifax’s finding that bank equity loan write-offs are down, Chessen’s own surveys indicate that delinquencies on home equity loans rose from 4% to 4.09% in the latest quarter.

Rate quotes and terms on home equity loans appear to reflect some of that uncertainty. A look at quotes on Oct. 5 at Bankrate.com showed that depending on how banks perceive local markets, rates can vary significantly.

For example, in suburban Maryland just outside Washington, D.C., Bank of America offers a $75,000 second mortgage at 6.34%, assuming that the borrowers have FICO credit scores in the 700 to 850 range — good to excellent — and a total loan-to-value ratio no higher than 80%. In Hawthorne, by contrast, the same loan size and criteria come with a 7.24% rate.

So be aware that while lenders are more willing to extend home equity credit, rates can vary depending on the location of the house, the loan size and your credit score.

Number of Low-Price Homes Plummets in State

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Number of Low-Price Homes Plummets in State

By Alejandro Lazo, Los Angeles Times

Properties priced below $313,200 are increasingly scarce as investor groups crowd out first-time buyers. As foreclosures drop, some parts of the Inland Empire have only one month’s home supply.

Competition for lower-priced homes in California is so hot that the number of cheaper homes available for sale has sunk more than 40% in the last year, pushing out many would-be buyers.

Homes that sold for $313,200 or less were the most competitive type of home nationally, but nowhere did inventory in that price range drop more than in the Golden State, according to a report released Thursday by real estate website Zillow.

In some parts of the Inland Empire, the supply of homes on the market is down to about a month’s worth, real estate agents say. Economists typically consider a six-month supply to be a healthy market.

The decline in homes for sale is frustrating many people interested in jumping into the housing market — home shoppers tantalized by the drop in prices and record-low mortgage interest rates.

Larry Rogers of Riverside, for instance, began the year with what he felt was a solid path toward retirement: buy two homes in the Inland Empire, pay them off before his golden years and live, in part, off the rental income. With a contractor’s license, a well-established business, plenty of cash and a high credit score, financing a home is not a problem, he said. The problem is finding one.

Rogers said he has gone into escrow twice and lost out both times, as other buyers have been willing to pay more. He has been shocked by competing investors paying $75,000 to $100,000 more than what he has estimated some homes to be worth.

“The big speculators have pooled all their money; they invest and they bid them up,” he said. “It’s crazy. Some of them, they pay pretty close to what it’s actually probably worth fixed up, but then by the time they put money into it, they are going to be $50,000 to $60,000 over.”

Behind the inventory squeeze is a sharp decline in the number of foreclosed homes on the market.

Foreclosure filings fell in September to the lowest level in more than five years, according to a report by RealtyTrac released Thursday. Substantial decreases in California and some other states hard hit by the collapse of the housing bubble helped reduce filings to 180,427 last month, down 7% from August and 16% from a year earlier. The last time filings were that low was in July 2007.

Demand in the West for homes has heated up, according to the Federal Reserve’s beige book of economic activity for the 12th District in San Francisco.
“Although still well below its historical average, the sales pace for new and existing homes picked up further in many areas,” the Central Bank reported.

“Contacts noted that pent-up demand may spur additional gains in coming months. Contacts reported a decrease in the inventory of available homes and a noticeable increase in construction activity.”

According to the Zillow report, Central Valley markets have seen the biggest drops in the supply of lower-cost homes, with inventory down 59.7% in Fresno and 55.4% in Sacramento. San Francisco’s supply fell 53.2%. In Los Angeles, supply was down 45.1%. Nationally, the bottom tier of homes for sale has had a decline of about 15.3%.

Principal Relief for Stressed Homeowners

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Principal Relief for Stressed Homeowners
By Kathleen Pender

A limited number of underwater homeowners in California will soon be able to get principal reductions of up to $100,000 apiece on Fannie Mae and Freddie Mac loans through the federally funded Keep Your Home California program.

The federal agency that oversees Fannie and Freddie has steadfastly refused to allow permanent principal reduction on loans they own or guarantee on the grounds it would cost taxpayers money. But in mid-September, Fannie and Freddie told servicers they could immediately begin accepting money for principal reductions from programs financed by the U.S. Treasury’s Hardest Hit Fund, including Keep Your Home California.

Fannie’s and Freddie’s willingness to accept money from Hardest Hit Funds does not signal a change of heart on the part of their regulator, the Federal Housing Finance Agency. Lest anyone get the wrong idea, Freddie says it will allow funds to be used for “principal curtailment.”

“We don’t consider it (principal reduction) in a way that is commonly understood. We are not writing off some percentage of the amount owed. We are simply accepting funds … through this program to allow it to be applied to unpaid principal or arrearage,” Freddie Mac spokesman Brad German says.

Fannie Mae spokesman Andrew Wilson says, “This in fact for us is not a principal reduction. It’s a principal payment. It’s as if your grandmother wanted to give you $50,000 to apply to your mortgage. In this case, the grandmother, as it were, was the Hardest Hit Fund.”

Taxpayer funded

That may be, but the money is still coming from taxpayers. The fund was set up in 2010 to provide $17 billion in homeowner assistance to 18 states hardest hit by the housing crisis.

The California Housing Finance Agency set up four programs under the Keep Your Home name to distribute California’s share – $1.9 billion. It allocated $772 million to principal reduction – enough to help an estimated 9,000 borrowers.

It could shift money from the other three Keep Your Home programs to provide more principal reductions, program director Diane Richardson says. The other programs make mortgage payments on behalf of unemployed and delinquent borrowers and provide transition assistance to homeowners who are going through a foreclosure or short sale.

To qualify for principal reduction in California, homeowners must live in the home, owe more than it is worth, be of low-to-moderate income, and be delinquent or have some hardship that puts them in imminent risk of default.

The balance on the first mortgage cannot exceed $729,750. Other rules apply, but there is no asset limitation. The maximum reduction is $100,000 per homeowner.

For eligible homeowners, the program will reduce mortgage payments to less than 38 percent of household income by reducing principal to between 105 and 140 percent of the home’s value.

The goal is to provide a sustainable mortgage payment, not to provide instant equity. For that reason, the principal reduction is structured as a loan that is forgiven after five years.

Five-year plan

If a homeowner gets $100,000 in principal reduction and within five years sells the home for a profit or refinances and takes cash out, the profit or cash-out – up to $100,000 – must be used to repay the loan. After five years, there is no repayment requirement.

Under the original rules, servicers had to reduce principal by $1 for every $1 in principal reduction provided by the program, but few write-downs got done.

In May, the program eliminated the matching requirement and since then more servicers have taken part. To date, 2,511 homeowners have received principal reductions totaling $185.6 million – or roughly $74,000 apiece.

Fannie and Freddie say the elimination of the matching requirement allowed them to participate in the principal reduction program, but servicers are still gearing up to accept the payments.

“GMAC is on board, they are processing manually,” Richardson says. “I think BofA will be on board in early November.” She says the other large servicers have agreed verbally to accept the payments but couldn’t say when.

Bank of America’s program

BofA “is preparing to launch a new Hardest Hit Fund recast program for underwater customers in November,” BofA spokesman Rick Simon says. “This program provides a one-time contribution through the Hardest Hit Fund to eligible customers to reduce their loan balance.

“Monthly payments are recalculated based on the new lower balance. There is no change to the mortgage rate or term.” He says Fannie and Freddie loans will be eligible for the recast program, but state housing finance agencies will control eligibility, application and approval.

Wells Fargo spokesman Tom Goyda says, “We continue to work through the details of how Keep Your Home California funds would be applied to the principal on loans controlled by Fannie Mae and Freddie Mac, but are not yet able to do principal reduction modifications on Fannie and Freddie loans through the program.

“We have participated in a Nevada program that allowed borrowers to apply some of that state’s Hardest Hit Funds to reduce the balance of a loan as part of a Harp refinance.”

The Federal Housing Finance Agency says it has not changed its stance against permanent principal reductions. “Under the California program, the Hardest Hit Funds are paying off some amount of the outstanding loan balance; Fannie Mae and Freddie Mac are not reducing principal and are not sustaining any losses,” agency spokeswoman Corinne Russell says.

In contrast, principal reductions under the Home Affordable Mortgage Program “would have resulted in substantial losses to both companies, both in the form of reduced principal and also from the infrastructure and systems costs.”

Foreclosure Victims Buying Homes Again

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Foreclosure Victims Buying Homes Again
By Pete Carey

Do you qualify? Getting an FHA loan after a foreclosure

LIVERMORE — R.C. and Stacy Davis lost their condominium to foreclosure in 2009, a bad break that seemed destined to keep them from buying another home for many years.

Yet on Wednesday — only three years after their foreclosure — the couple signed the papers to buy a four-bedroom house in Livermore.

Their avenue to homeownership? A loan backed by the Federal Housing Administration.

“We’re as happy as can be,” Stacy Davis said.

The ability to get an FHA loan so quickly after a foreclosure could be welcome news to thousands of people who lost their homes during the housing bust. In the coming 12 months, about 22,000 Bay Area foreclosures will hit the three-year mark.

Fannie Mae and Freddie Mac make people wait seven years after a foreclosure, the FHA will approve loans after three years, providing the buyer has established good credit and the ability to pay the mortgage.

“There’s definitely a movement of folks who have had a foreclosure to re-emerge and re-engage in the market,” said Dustin Hobbs of the California Mortgage Bankers Association. He said brokers around the state have picked up on the trend.

“It helps the housing market,” said Guy Schwartz of CMG Financial in San Ramon, which handled the Davis’ mortgage.

The FHA, which is self-supporting, provides mortgage insurance for loans with low down payments and more flexible household income requirements. The Davis loan came with a 3.5 percent down payment plus required monthly mortgage insurance and a 3.75 percent interest rate on a 30-year loan.

“A FHA loan is a good option for those who can qualify,” said Paul Leonard, California director of the Center for Responsible Lending. And there couldn’t be a better time to try, he said.

“We are at near substantial price corrections,” he noted. That, and low interest rates present “kind of a historic opportunity if people can qualify,” he said.
But it’s not clear whether there’s a flood or a trickle of new borrowers with foreclosures in their recent past.

The FHA said it doesn’t have data on how many of the loans it insures involve people who are buying homes after a foreclosure or short sale.

Wells Fargo, the country’s largest FHA loan originator and servicer, said it doesn’t break out those loans. In the first six months of this year, Wells Fargo has made more than $73 billion in FHA-backed loans compared with $47 billion last year, spokesman Jim Hines said.

Mason McDuffie Mortgage in San Ramon is working with foreclosure victims.

“We are making loans and have made loans to people who have corrected their credit,” said Bill Godfrey of Mason McDuffie. “It’s nice to see.”

The borrowers are “people who waited three years, have a job and qualify,” Godfrey said. “They have their credit, have a job and things are looking better.

They may not be perfect … but that’s part of the way to move forward. Clearly there is some thawing in that area.”

Some listing agents complain FHA loans take a lot more time and work. “It’s a hard transaction to complete,” said Bob Barrie of Keller Williams in San Jose.

Barrie said he is listing a home next week in Santa Clara, and if there are multiple offers, a buyer with an FHA loan will be at a disadvantage.

The Davis’ journey from foreclosure to new home began in 2005 when they bought a condo in Concord for $262,000 at the peak of the market.

The couple’s interest-only, 100 percent-financed loan was a classic bubble product that became a formula for foreclosure during the housing crash.

To make things worse, the condo was in a rough neighborhood, said Stacy Davis, who is a special-education teacher at Mission San Jose High School in Fremont. Her husband is a senior producer for the Golden State Warriors.

They tried to sell the condo after their daughter was born, but no one wanted to buy it, Stacy Davis said. “We decided we’re going to try to stick this out. We owned it and we would make it work.”

So they remodeled, put in a new kitchen and molding.

Meanwhile, the neighborhood deteriorated. Shopping carts piled up on the sidewalk, she said. Graffiti blossomed on walls.

After their son was born, they tried a short sale and found a buyer. “Within a week, an upstairs bathroom pipe busted open and flooded the whole place — the new kitchen, the molding, all destroyed. So the buyer backed out,” she said.

Their condo in ruins, they moved to a rented house in Dublin and the bank foreclosed. Their credit rating dropped to about 500, but they were able to build it back to about 700.

“Within a year we were getting credit card applications. We didn’t feel like it affected our lives at all,” she said.

The purchase of the house in Livermore completed, the Davis family will begin moving in early next month.

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Potential Borrowers Eager to Find Lenders with Superior Service

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Potential Borrowers Eager to Find Lenders with Superior Service
By Lew Sichelman November 4, 2012

More than a third of potential borrowers would be willing to pay a higher rate if the mortgage came with superior service, according to a new survey.

The poll by the Carlisle & Gallagher Consulting Group didn’t say how much more the 34% were willing to pay. But it did find that the “pay mores” are a frustrated bunch.

More than half think the process is too slow. A third find it impossible to track the status of their loan application, an equal percentage say it is too difficult to talk with their lender, and a quarter don’t believe the advice they receive.

All this tells Tom Mataconis, vice president of consulting for the firm based in Charlotte, N.C., that banks must do a better job to win market share. But it doesn’t tell borrowers how they can determine which lenders offer the best service.

A starting point is to ask your real estate agent. Agents know which lenders keep their promises and close quickly without incident. After all, their livelihoods depend on it.

Also quiz friends, co-workers and relatives about their experiences.

Beyond that, prospective borrowers should look for several attributes that will help them find a responsive company or accessible loan officer.

Look for a consistent point of contact. Federal regulators have already settled on this as a requirement for loan servicers — the companies that collect payments, disburse funds to cover property taxes and homeowners insurance and otherwise administer loans — so why not one for borrowers?

“Many lenders have discovered that consumers appreciate a single contact, someone they can reach out to for help or support at any time,” says Andy Crisenbery of the mortgage technology company ELynx.

At the same time, you may not want to be bothered during certain periods of the day. If that’s the case, make certain your feelings are known, suggests David Lo, director of financial services at J.D. Power & Associates, the market research firm that judges customer satisfaction in various industries. If you want to be reached only by email or only by phone from 9 a.m. to 5 p.m., tell the lender.

Crisenbery also says you’ll have a better experience if the lender has a way to get the necessary loan papers to you as quickly as possible. If you are old-fashioned, that might be by fax or overnight delivery. But if you are more current, it could be via the Internet.

Many institutions are putting all the documents the borrower needs to review directly into an online portal, Crisenbery says.

His company offers a product called EDelivery, which delivers documents by email “almost instantaneously” and which requires several layers of authentication, making it more secure than regular email.

At a recent Mortgage Bankers Assn. conference in Chicago, an ELynx competitor called LenderMobile launched an app for iPads (and, soon, for Android devices) that enables customers to fill in the standard 1003 application form and otherwise check on the status of their loans, all from their mobile device.

The lender also can set up the app to notify customers when rates hit a desired target or change enough to meaningfully affect monthly cost, either up or down.

The app “puts the entire process in the borrower’s hands,” Vice President Lovina Worick says. “You can even take a picture of a required document and send it straight to the loan file.”

At the same show, Kofax debuted software that enables lenders to not only snap photos of W-2s and other support documents with their smart devices but also to extract data from the photos and use it to populate loan applications, all from the kitchen table.

You’ll also want to deal with a company that provides up-to-date status information. There’s nothing worse than chasing down an unresponsive loan officer to make sure this document or that report has been received, or to find out whether underwriting has looked at the application.

“One complaint borrowers have with the industry relates to the lack of timely status updates,” Crisenbery says. “By providing real-time updates, borrowers will know exactly what’s happening with their loans.”

Beyond technology, Lo at J.D. Power suggests picking a lender that promises to provide the closing documents before closing. That way, you’ll have plenty of time to find any discrepancies between the initial quote and what’s now on the closing sheet, and to have the loan officer explain the differences to your satisfaction.

Speaking of accurate closing costs, LendingTree, the online mortgage search engine, recently asked the 300 companies on its network what questions borrowers should be asking. The top answer: What are the total costs involved in the loan?

In that regard, shopping website MortgageMarvel.com guarantees that the charges quoted by one of its lenders will be within $50 of actual charges. If they’re not, it will pay borrowers up to $2,500.

“We believe it’s important for consumers to understand and know these costs as early as they can in the mortgage application process,” MortgageMarvel Chief Executive Rick Allen says. “We’ve worked hard to make sure the closing fees they see on our site are accurate, and we’re willing to stand behind them.”

Report 32 %of Homebuyers are First-Timers

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Report 32% of Homebuyers are First-Timers
Lily Leung

Nearly one in three homebuyers in September were first-timers to the housing market, reported the National Association of Realtors on Wednesday in its Realtors Confidence Index.

That’s up from 31 percent recorded in August and down from the historical norm of 40 percent, based on research from the trade group. The share of first-time buyers peaked in 2009, when it was 50 percent.

The change can be explained by the stricter guidelines to obtain mortgages, lengthy short sales and a high rate of investor purchases that often involve cash, the report said.

“Unsuccessful first-time buyers typically continue their property search, sometimes making a number of bids before securing a property,” it continued to state.

Related: 6 tips for first-time homebuyers

Common complaints from Realtors include: “Banks are not lending,” banks are “taking way too long to give approval,” and banks are “requesting more paperwork and records.”

Locally, it appears first-time homebuyer interest is strong, if a recent workshop hosted by the San Diego Association of Realtors is any indication. Nearly 150 people came out to the Oct. 20 event to learn about financing options, types of sales and tips to be a more appealing buyer.

Figures from the National Association of Realtors are based on more than 3,400 responses from surveyed Realtors from Sept. 24 to Oct. 1

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New Home Sales Hit 2-Year High

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New-Home Sales Hit 2-Year High
By Chris Isidore @CNNMoney 10/24/12

NEW YORK (CNNMoney) — In another sign of a housing market recovery, new-home sales rose in September to the highest level in more than two years, according to a government report released Wednesday.

Sales sold at an annual rate of 389,000 homes in the month, according to the Census Bureau report, up 5.7% from the 368,000 sales pace in August. The last time sales were at this pace, in April 2010, they were being helped by a short-term home buyer’s tax credit.

How to Spot a Recovering Market

If key local sales indicators beat the U.S. averages (as they do in the areas below), your market is probably picking up — and prices will soon follow.

Metro Area % w/Drop in List Price  – Days Listed On Zillow  –  Sale-to-List Price Ratio

San Jose, Cal.  –  16.5% –  51 –  1.01

Cheyenne, Wyo.  – 21.7% –  88 –  1.08

Clarksville, Tenn.  – 30.6% –  103 –  0.98

National Average  – 30.7% –  113 –  0.97

NOTE: Zillow, based on June 2012 data.

This time, the new home market has been showing steady signs of improvement. The pace of home building hit a four-year high in September, according to a separate government report. The year-over-year sales improvement in September reached 27.1%.

The improvement in the market is part of a broader recovery in real estate, helped by a number of factors all coming together.

Mortgage rates are near record lows, pushed down by the Federal Reserve’s decision to buy $40 billion in mortgages to spur greater economic growth. The low rates, coupled with years of weak home sales, have resulted in affordable housing prices. Recently, home prices have started to rise, which is attracting buyers who were waiting for prices to bottom out.

There has also been a drop in unemployment, a positive development for people looking for mortgage loans.

Foreclosures have fallen to a five-year low, reducing the supply of distressed homes available on the market.

Related: A new housing boom

“All the housing data has taken a turn for the better,” said Steven Ricchiuto, chief economist for MSUSA. “Clearly mortgage rates at such a low level and what appears to be an increase in banks’ willingness to make loans has boosted activity off the lows.”

New-home sales are an important component of the nation’s overall economic activity. Not only do they require people working in construction to build the homes, but they also spur the purchases of appliances, carpeting and other furnishings.

Investment guru Warren Buffett said in a television interview Wednesday that the recent recovery in housing is one of the factors making him more optimistic about the U.S. economy.

Related: Is buying rental property now a sure bet?

The median price of a new home sold during the month was $242,400, down 3.2% from the August reading but up 11.7% from a year earlier. The slight decline in the month-over-month price reading was partly due to most of the increased sales coming from the South, a region that has lower prices on average.

The upward pressure on prices over the last year has been helped by the tight supply of new homes on the market. The report showed inventories fell to 4.5 months, the tightest supply of homes since August 2005, near the height of the housing bubble.

Related: Housing is indeed heading higher

The actual number of homes available for sale was little changed, with the tighter supply coming from the stronger sales pace.

“Home builders had previously been content to cut the pace of starts back dramatically and well below the pace of sales, thereby letting the level of new-home inventory decline,” said Michael Gapen, economist with Barclays Capital. “That inventory levels have stabilized… suggests that home builders are becoming more comfortable carrying these inventory levels.”

Still the pace of new-home sales is still far below the levels seen during the housing bubble of the last decade, when they topped 1 million every year between 2003 and 2006. And Ricchiuto said it’ll take a much stronger labor market before he’s convinced that housing has turned the corner.

“We have seen false starts before,” he said.

Still the report lifted the stocks of many leading home builders, with DR Horton (DHI), KB Home (KBH) and Toll Brothers (TOL), PulteGroup (PHM) and Lennar (LEN) all rising more than 1% in morning trading. All five of those stocks are up between 70% to 178% so far this year.

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Home Prices Rise in 81% of U.S. Cities as Markets Recover

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Home Prices Rise in 81% of U.S. Cities as Markets Recover
By Prashant Gopal – Nov 7, 2012

Prices for single-family homes rose in 81 percent of U.S. cities as the property market extends a recovery from the worst crash since the 1930s.

The median sales price increased in the third quarter from a year earlier in 120 of 149 metropolitan areas measured, the National Association of Realtors said in a report today. In the second quarter, 110 areas had gains.

Investors, who make up the bulk of cash purchasers and compete with first-time buyers, accounted for 17 percent of all transactions, down from 20 percent a year earlier.

Investors, who make up the bulk of cash purchasers and compete with first-time buyers, accounted for 17 percent of all transactions, down from 20 percent a year earlier. Photographer: Daniel Acker/Bloomberg Values are climbing after a six-year slump as buyers compete for a shrinking supply of properties listed for sale. U.S. home prices jumped 5 percent in September from a year earlier, the biggest 12-month increase since July 2006, CoreLogic Inc., an Irvine, California-based real estate data provider, said yesterday.

“The housing recovery still faces a number of potential headwinds,” Paul Diggle, property economist for Capital Economics Ltd. in London, said in a note to clients after CoreLogic’s report was released. “But our central case is that tight supply conditions will mean that house prices will continue to rise steadily next year.”

At the end of the third quarter, 2.32 million existing homes were available for sale, 20 percent fewer than a year earlier, according to the Chicago-based Realtors group.

Short Sales

The national median price for an existing single-family home was $186,100 in the third quarter, up 7.6 percent from the same period last year, the Realtors said. Foreclosures and short sales, in which the price is less than the mortgage balance, accounted for 23 percent of third-quarter deals, down from 30 percent a year earlier.

The share of all-cash home purchases fell to 27 percent in the third quarter from 29 percent a year earlier. Investors, who make up the bulk of cash purchasers and compete with first-time buyers, accounted for 17 percent of all transactions, down from 20 percent a year earlier.

The best-performing metro area was Phoenix, where prices increased 35 percent from a year earlier. Prices rose 28 percent in the Cape Coral, Florida, area, and 27 percent in Akron, Ohio.

The Raleigh, North Carolina, area had the biggest decline, with the median selling price falling 16 percent in the quarter. It was followed by York, Pennsylvania, with an 9.4 percent decrease; and Binghamton, New York, with a 6.6 percent drop.

A survey by Fannie Mae, the nation’s biggest mortgage-finance company, showed Americans expect home prices to increase an average of 1.7 percent in the next 12 months. The share of respondents who said they expect home prices to decrease fell to 10 percent last month, down 13 percentage points from a year earlier and the lowest level since the monthly survey began in June 2010, Washington-based Fannie Mae said today.

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Foreclosures Drawing Cash as 401K Returns Sag: Mortgages

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Foreclosures Drawing Cash as 401K Returns Sag: Mortgages
By Kathleen M. Howley – Nov 4, 2012 9:00 PM PT

David and Michelle Haisley from Fort Wayne, Indiana, weren’t happy with the performance of their retirement funds, so they made another investment – a foreclosed home for $27,000.

Haisley, a heating and air-conditioning technician, said he worked on the house before it went into default and decided to make an offer when he saw it listed at about a third the price of surrounding homes. They’ve already found tenants for the house and David said they’ll buy another foreclosure if they can find the right deal.

Investors bought about 66,780 homes in August, the highest since the beginning of the foreclosure crisis, according to Bloomberg calculations based on National Association of Realtors data.

Investors bought about 66,780 homes in August, the highest since the beginning of the foreclosure crisis, according to Bloomberg calculations based on National Association of Realtors data. Photographer: Matthew Staver/Bloomberg

“It’s an income stream for us, and when it’s time, we’ll sell it and make more money than we could from our 401K,” said Haisley, 49, who rents out the property for $900 a month for an annual return of more than 20 percent, excluding appreciation. “There’s nowhere for prices to go but up, so it seemed like a pretty safe bet.”

As the housing market recovers from the worst bust since the Great Depression, neophyte investors like the Haisleys are following the lead of private-equity firms like Blackstone Group LP, investing in properties they can pick up cheaply, rent and sell when values rise enough. Home prices rose 4.6 percent from a year earlier in August, the biggest gain since the end of the real estate boom in 2006, according to a CoreLogic Inc. index.

“The typical small-size mom-and-pop investor has two or three properties, looking at it as an income supplement with the possibility of being able to sell at some point when prices rise enough for them,” said Lawrence Yun, chief economist of the National Association of Realtors.
Stock Wary

Investors are becoming more comfortable with real estate after the six-year housing slump, which brought prices down nationwide by 35 percent, according to the S&P/Case-Shiller index. Many remain skeptical of stocks, even as the Standard & Poor’s 500 index has more than doubled since falling to a 12-year low in March 2009.

“I’d rather buy real estate than gamble on the stock market or get almost no return from putting my money in a bank,” said Barton Wallace, 60, a real estate investor and broker in Hingham, Massachusetts, who owns four rental properties. “I don’t have any problem getting tenants.”

Wallace, who turned to real estate four years ago when she couldn’t get a full-time job, has one client who cashed out his home’s equity to buy his first foreclosed home. Other clients are tapping retirement accounts for the same purpose, transferring their cash into self-directed Individual Retirement Accounts that allow them to make their own investing decisions, with returns going back into the accounts, she said.

Indirect Plays

Investors bought about 66,780 homes in August, the highest since the beginning of the foreclosure crisis, according to Bloomberg calculations based on National Association of Realtors data. Investors’ share was 18 percent of sales. About 90 percent of those homes went to people with fewer than 20 properties, Yun estimated.

“Some people are making an indirect real estate play by investing in funds that buy foreclosures to rent, but most of the demand is from small-scale investors who live in the community,” Yun said. “It provides a decent rate of return for them because rents are rising and prices are still low.”

The average U.S. rent rose to a record $1,086 a month in the third quarter, a gain of 3.3 percent from a year earlier, according to MPF Research in Carrollton, Texas. The vacancy rate fell to a 10-year low of 8.6 percent in the second quarter, according to the Commerce Department. There are about 40 million rental units in the U.S., compared with 75 million owner-occupied homes.

‘Risky Move’

For individual investors, “the demand is there, but it’s a risky move if you are putting all your eggs in that one basket,” said Greg Willett, director of research for MPF.

Even with rent gains, buyers of distressed properties to rent would need to get a discount of about 30 percent to get a yield of 8 percent, said Paul Diggle, a real estate economist for London-based Capital Economics Ltd. If investors are looking for 12 percent yields, they’d need to get a 50 percent discount, he said.

The simplest way to calculate yield is to subtract expenses from annual rent and divide by the cost of the property. A $125,000 home will yield about 8 percent a year if a tenant pays $1,200 a month in rent and monthly carrying expenses are $400.

That formula doesn’t account for the time a landlord may spend responding to disgruntled tenants and repairing burst water pipes, broken furnaces or leaky roofs, Diggle said. Many homes in foreclosure are neglected, which could lead to maintenance problems down the road, he said.

‘Sweat Equity’

“Small-scale investors may actually run at a loss on rental housing if their sweat equity is accounted for,” Diggle said.

Yovaldi Venter, a first-time real estate investor, is buying a foreclosed property using money from her retirement funds. She said she plans to buy her first property before the end of the year after transferring some of her 401K into a self-directed IRA this month.

Her target: a duplex on the south side of Jersey City priced at $60,000, a fifth of what it went for in 2008 when it last sold. Its two rental units bring in $2,000 a month, according to Venter, 45.

“It would be a buy-and-hold with an eye on the long-term gain — a stream of income for now, with the possibility of selling it when prices come back,” Venter said.

Gary Hippensteel, who owns six properties he rents in Indianapolis at about 10 percent yields, said he didn’t want to keep his money in a bank because it earns “next to nothing.”The highest yield for a one-year certificate of deposit in the U.S. last week was about 1 percent, according to Bankrate.com.

“People want the safety of having a tangible asset,”Hippensteel said. “While it’s still subject to volatility in the overall economy, you at least have an asset that people will need, because if they can’t buy a house they are going to have to rent.”

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Borrowing to Build Your Own Home

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Borrowing to Build Your Own Home
By Lisa Provost, New York Times

Construction financing isn’t the type of loan one goes shopping for online; it is more likely to be found up the street. “The places that are offering construction financing are typically the credit unions and the regional banks,” said John Walsh, the president of Total Mortgage Services, a Milford, Conn., lender.

Local banks are more comfortable making home construction loans because they know the local market. But qualifying is more complicated than for a conventional mortgage. Borrowers have to do a lot more legwork ahead of time because, in addition to proving that they can afford the cost of the house, they must show that they have a viable project.

“People want to make sure they know what they need to do early in the process,” said Penn Johnson, the president of the Stamford Mortgage Company, a broker. “You can’t apply until after you have building plans, a construction contract and a cost estimate.”

The cost of the land may be figured into the construction loan amount, if the borrower doesn’t already own the lot.

“People either pay cash for the land, or they contract to pay cash for the land when the project’s completed, or they pay it out of the construction loan,” said Debi Orr, an agent with Keller Williams Realty in Ridgefield, Conn. But if they’re not paying at the outset, “they’re going to have to have a pretty solid down payment to qualify.”

The down payment is figured as a percentage of the total cost of the project (land and construction costs). In general, the loan-to-value restrictions are “pretty onerous,” requiring 20 to 30 percent down, said Mark Yecies, an owner of SunQuest Funding in Cranford, N.J.

Some lenders offer construction financing as a separate, short-term loan — usually no longer than a year. The borrower refinances into a permanent mortgage after the house is completed.

Increasingly, lenders are combining the two into a single 30-year loan, with a single closing, called construction-to-permanent financing. The streamlined loan process cuts down on closing costs, but some borrowers may prefer not to be locked in and to retain instead the flexibility to shop for mortgages.

That is because interest rates on construction-to-permanent loans are a little higher than on conventional mortgages.

“You might be paying an extra quarter to a half a percent above Fannie Mae” on such a loan, Mr. Johnson said, comparing that with “a 30-year fixed in the low 4 percent, and a 5-to-1 adjustable-rate mortgage at 3 percent.”

As funds are disbursed during construction, lenders charge the borrower only for interest on the amount owed. Yet the steep down-payment requirement for construction loans is limiting.

And those who hope just to buy land for a future home will find financing no easier. Lending for land alone, with no clear timeline for construction, is difficult to find, mortgage brokers say. Banks deem these loans to be very risky, “because there’s nothing really tying anybody to a piece of raw land,” said Mr. Walsh of Total Mortgage.

“If the borrower loses a job or runs into financial trouble,” he said, “the land will probably be one of the first things they stop paying on. Banks may compensate for that by asking for 50 percent down.”

In Scarsdale, New Rochelle and Mamaroneck, N.Y., builders are paying all cash for building lots, said Iris Kalt, an agent with Prudential Centennial Realty. Likewise, in Litchfield County, Conn., “the people that are buying the expensive pieces of land are usually buying them straight out,” said Kathleen Harrison, a principal of Fazzone & Harrison Realty in Sherman

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