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Fannie-Freddie Short-Sale Program May Hurt Sellers Credit Scores

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Fannie-Freddie Short-Sale Program May Hurt Sellers’ Credit Scores

Homeowners who qualify for the Fannie-Freddie short-sale program could see their credit scores fall, even when they’ve made timely payments on their loans.

By Kenneth R. Harney

WASHINGTON — With generous new guidelines from Fannie Mae and Freddie Mac likely to stimulate large numbers of short sales by underwater homeowners, what effect will the sales have on the sellers’ credit scores?

It’s a crucial question, because short sales typically cause FICO scores to plummet, sometimes 150 points or more. This, in turn, complicates sellers’ credit capabilities for years and makes additional borrowing — whether for auto loans, credit cards or new mortgages — tougher and more expensive.

The issue arises now because Fannie Mae and Freddie Mac — the dominant sources of home loan funds — recently outlined plans to approve short sales for underwater borrowers who are current on their loan payments, provided that they face an imminent hardship. Although the numbers of participants in the plan won’t be known for months, the two companies combined have about 3.7 million underwater mortgages in their portfolios on which borrowers are making their payments on time, according to federal regulators.

Short sales traditionally have been associated with extended periods of delinquency by borrowers. The technique itself — in which the lender agrees to accept less than what’s owed and the property is sold — usually has been employed as an alternative to foreclosure.

As a result, FICO credit scores — the major risk predictive tool used in the mortgage industry — have severely penalized borrowers who opt for short sales. VantageScore, the FICO rival created by the three national credit bureaus, also hits short sellers with triple-digit point losses.

In a recent blog post, Frederic Huynh, FICO’s senior scientist, said statistical reviews of short sellers by the company concluded that they “represent a high degree of risk” to lenders. More than 55% of short sellers in a sample of borrowers from 2007 to 2009 went on to later default on other credit accounts after completing the sale transaction. This ranks them in the same “heavyweight” risk class as people who have been foreclosed upon, filed for bankruptcy, or had a tax lien or collection account.

But hold on. Won’t underwater homeowners who qualify for the upcoming short-sale program be fundamentally different? Won’t they have solid mortgage payment histories despite being underwater? Why should they have to take the same heavy hits to their scores earned by people who didn’t pay their mortgage for months on end?
Good questions, but it appears that these sellers won’t get the break they deserve. The scoring system, credit experts say, isn’t set up to recognize — or properly report — short sales by on-time mortgage customers to the national credit bureaus. And the credit score companies aren’t planning to make any changes to the penalties their models assign to people who participate in short sales.

Anthony Sprauve, a spokesman for Fair Isaac Corp., developer of the FICO score, says that in general, when a loan is paid off for less than the full balance, it is “classified as a severe negative item” by the FICO scoring model. And “there are currently no plans to change,” he added.

Sarah Davies, senior vice president for research and analytics for VantageScore Solutions, said her company probably won’t modify its scoring algorithms either, despite the fact that the seller was not delinquent and came to a mutually satisfactory resolution with the lender.

Terry Clemans, executive director of the National Credit Reporting Assn., an industry trade group, says this is all inherently unfair for borrowers who have continued to make timely payments on their loans. Crushing them with deep credit score penalties “doesn’t reflect the fact that these people are actually excellent credit risks. They simply encountered an extraordinary situation” — namely, the national home value bust — which put them underwater.

A Fannie Mae spokesman, Andrew Wilson, said his company has no control over how short sales — whether of people who paid on time or those who didn’t — are scored. But when borrowers do a short sale rather than force the lender to foreclose, Fannie rewards them: They are potentially eligible for a new mortgage again within two years of a short sale. People who go to foreclosure, by contrast, may not be able to get a new Fannie loan for as long as seven years.

Bottom line: If you’re underwater and plan to use the new Fannie-Freddie short-sale program this year, don’t bank on any special favors when it comes to your credit score. It looks as if you’re going to take a big hit, despite all your on-time payments.

For-Sale Listings Drop Again, Led by California Cities

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For-Sale Listings Drop Again, Led by California Cities

Falling inventories are a leading driver behind the recent rally in home prices, and the declines point to continued price-strength in many parts of the Western U.S., which are also benefiting from strong investor demand.

Among the 15 cities with the largest year-over-year declines, some 13 were in California, led by Oakland, which posted a 58.4% decline. Other big declines came in Stockton (down 45%), Fresno (down 43.1%), Sacramento (down 42.4%), Riverside-San Bernardino (down 41.8%), Bakersfield (down 41.4%), and San Jose (down 41.1%).

Inventory declines have typically preceded stronger prices if demand stays the same, because more buyers are chasing fewer homes. But low inventory could also curb transaction volumes if buyers, frustrated by the lack of choice, sit on the sidelines.

The two metros outside of California with large declines were Atlanta and Seattle, where inventories fell by 41.1% and 37%, respectively.

Median asking prices, meanwhile, fell by 2.5% nationally from July and were nearly flat compared with one year ago. Asking prices were up from one year ago in 92 metros, flat in nine, and down from one year ago in 45.

The Realtor.com figures include sale listings from more than 900 multiple-listing services across the country.

Inventories tend to increase by around 2% in August over the past 28 years, according to Zelman & Associates, a research firm, as sellers make one last push before the beginning of the school year.

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Repeat Home Buyers a Rare Breed

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For information about luxury and coastal properties in Southern California, call Bob Cumming of Keystone Group Properties at 310-496-8122. Keystone Group Properties services buyers and sellers of exclusive California homes in Newport Beach, Dana Point, Laguna Beach, Laguna Niguel, Coto de Caza or Malibu beach homes and beautiful La Jolla CA real estate.

Repeat Home Buyers a Rare Breed

By Carolyn Said in the San Francisco Chronicle

After selling their San Ramon home, Erick and Nichole Ormsby recently moved into a bigger house in a better school district in Danville.

Such “move-up buyers” have long been the lifeblood of a vibrant real estate market, accounting for significant chunks of supply as they sell their homes, and demand as they buy larger ones.

But post-housing crash, they remain a rarity.

Even as the market begins to recover, the dearth of move-up buyers is one reason inventory continues to be scarce in the Bay Area and nationwide.

“In the grand scheme of things in housing market history, the repeat buyer – whether move-up, move-across or in the case of empty nesters, move-down – has provided a steady stream” of new listings, said mortgage analyst Mark Hanson. “Now the repeat buyer is down for the count.

“The majority of demand is coming from first-time buyers and investors, who don’t leave a unit of supply for someone else to buy.”

Millions of people who might otherwise be move-up buyers are stuck in place because their homes are underwater. Even people who are not fully underwater can’t move, Hanson said, since they need equity of 5 percent to pay real estate costs in a sale and then another 20 percent for a down payment.

“Households that owe more than 80 percent (of the home’s value) are ‘effectively underwater,’ ” he said. “In California, 53 percent of households with a mortgage are in that category. Nationwide, it is 49 percent of the mortgaged homes.”

He pegs the number of such “effectively underwater” homes nationwide at 25 million.

Fortunate – and rare

The Ormsby family was in the fortunate – and rare – situation of having equity in their home, which they’d owned for 13 years, as well as stable employment.
“We wanted a bigger yard for the kids (ages 5, 7 and 9) in a nice neighborhood that would work for us,” said Erick Ormsby, who is president of Alcosta Capital Management, an investment advisory in San Ramon.

“Interest rates are low, so that was a motivating factor to lock in a low rate now; we got 3.75 percent on a 30-year fixed mortgage. My concern is that the market is going to be getting a lot better and prices will be going up, so it would be harder and harder to get the kind of house we wanted.”

Underwater homes tend to be owned by younger people – the same ones who ordinarily would be seeking larger homes as their families grow, said Stan Humphries, chief economist of real estate site Zillow.com.

Less inventory

“With so many cohorts under 40 being underwater, it has gummed up the treadmill of the housing market. You expect new home buyers to get on the treadmill, accumulate equity, then take a step forward” to a larger house.

Negative equity also is disproportionately concentrated in lower-cost homes – the more affordable residences that first-time home buyers would like to bid on, if they were on the market.

At the same time, foreclosures have fallen, in part because of government programs designed to help people stay in their homes. That also means that fewer of the more-affordable homes are being listed for sale.

“In any given month, only a certain number of homes are trickling onto the market,” said Errol Samuelson, president of real estate listing site Realtor.com. “All these buyers are converging on those homes.”

Out of 146 markets Realtor.com tracks, all but two saw inventory shrink this year compared with the same time last year, he said.

Road to recovery

However, there are some upsides to the slow pace of new for-sale homes, he said.

“As homes become less underwater (and go on the market), it makes for an orderly recovery,” he said.

In fact, the real estate market continues to exhibit signs of stabilizing. On Tuesday, the authoritative Case-Shiller index showed home prices rising in all 20 markets it follows.

The tight inventory also contributes to rising prices, which helps wipe out negative equity and may lure some people to sell.

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Personal Finance: Is a Mortgage Refinance Right for You?

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For information about coastal and luxury Los Angeles real estate, Orange County CA homes, and San Diego homes in La Jolla and Mission Beach, call Bob Cumming of Keystone Group Properties at 310-496-8122.  Keystone Group Properties services discriminating buyers and sellers of Southern California homes— Beverly Hills, Malibu, and Santa Monica to Newport Beach, San Juan Capistrano to La Jolla,.

Personal Finance: Is a Mortgage Refinance Right for You?

By Claudia Buck

They’re knocking on the lender’s door. As mortgage rates have tumbled to all-time lows, demand for refinancing has fired up homeowners nationwide.
And it’s not just those drowning in underwater mortgages. With rates for 30-year mortgages hovering below 4 percent since last October, all kinds of homeowners are trying to get their monthly mortgages reduced, say lenders and mortgage experts.

“It’s huge. It’s buried our staff and every other lender in town,” said O.J. Vallejo, mortgage consultant with First Priority Financial in Sacramento, who said his three-person staff has been working six days a week the last four months.

Nationally, refinance volume “has been running at a three-year high in recent weeks, as mortgage rates remained extremely low,” Mike Fratantoni, vice president of research for the Washington, D.C.-based National Mortgage Bankers Association, said in an email. “With refinances, the No. 1 driver is interest rates.”

Along with months of record-breaking low interest rates, other factors are driving the refinancing boom: a competitive lending market and changes in some federal refinancing programs for struggling homeowners.

It’s prompted many established homeowners with old-school, high-interest mortgages to decide it’s time to refi.

Neil and Louise Mueller, longtime Land Park residents, were encouraged by their financial planner to look into refinancing their mortgage last spring.
“It was almost too easy,” said Louise, an American River College counselor, who said the process, including a home appraisal, took about three weeks.

The result: Their 30-year, fixed-rate mortgage dropped from 5.12 percent to 3.87 percent, which lowered their monthly payment by about $100. They also pulled out about $11,000 for savings and for a family cruise overseas with their two adult children.

Why refi?

Generally the primary reasons for refinancing a mortgage are to:

  • Lower monthly mortgage payments.
  • Eliminate the unpredictability of an adjustable-rate mortgage by switching to a fixed rate.
  • Free up home equity cash for home improvements, college costs or other expenses.
  • Shorten the loan term, say from a 30- to a 15-year mortgage, which can save thousands in interest payments.

Saving money is usually the biggest incentive.

Calling the low rates “historic,” John Winters, a wealth adviser with Morgan Stanley Smith Barney in Sacramento, said he recently advised all his clients to consider a refi. Especially for those “finding it difficult to live with” the anemic returns on low-interest CDs and bonds, freeing up monthly income by refinancing can make sense, he said.

Should you refi?

It’s a personal calculation that varies. Generally, you look at how long you plan to be in your current home and whether the upfront costs outweigh the monthly savings.

“If you’re not going to be in your home another one or two years, you’re not going to recoup the closing costs,” said Greg McBride, senior financial analyst with Bankrate.com.

“Everybody’s situation is different,” said mortgage consultant Vallejo. “There’s no right or wrong answer. The only answer is what works for your family.”
Some couples who refinance are looking ahead to retirement.

“Paying off the mortgage is now back in vogue,” Vallejo said, especially for those in their late 40s or 50s, who want to be mortgage-free at retirement age.

That doesn’t necessarily mean they’ll lower their monthly payment by refinancing. For example, a couple with a $250,000, 30-year loan at 5.25 percent three years ago would have been paying about $1,380 a month. If they refinanced their current balance to a 20-year, 3.5 percent loan today, their payments would increase slightly, to $1,405.

“Their payment goes up $25, but they just took seven years off their mortgage,” said Vallejo. “That’s almost $116,000 in interest. That’s huge.”
On the other hand, younger homeowners with kids might choose a 30-year mortgage when they refinance because they need the lower monthly cash flow to save for college or pay off debt. Or those with adjustable mortgages due to reset to higher rates may want to lock in single-digit rates.

What you’ll pay

The mortgage rate you’ll be offered depends on numerous factors, including: your credit score, loan amount, loan-to-value ratio (how much you owe compared to the home’s appraised value), length of your loan term and type of home (rates on condos, rentals and vacation homes are typically higher.)
Lots of mortgage ads promise “no-cost” loans. According to some lenders, that’s a misnomer.

“It really means ‘no cash out of pocket,’ ” said Vallejo. “There’s no free lunch; somebody is paying for it.”

Typically, in a no-cost loan, all closing costs and pre-paid items (such as appraisal fees and credit checks) are paid by the lender and built into the interest rate.

Shop around

It pays to compare quotes from several lenders because they offer different rates and fees. Start with your current lender or sit down with a local loan originator. You can also do refinance comparisons online, using mortgage calculators at sites like Bankrate.com or those of individual banks and lenders.

If you’re a struggling homeowner, ask your lender about changes in the federal Home Affordable Refinance Program and FHA refinance programs that have made refinancing options more plentiful.

Bankrate.com’s McBride said the refinance market is particularly “compelling” in California, where home prices have bottomed out and there are lots of competitive lenders.

But don’t focus solely on interest rates, said McBride. When comparing refinance quotes, look at appraisal fees, title searches and closing costs. And be sure you’re comparing the same loan terms, not a 15- and a 30-year, for instance.

Good standing

Be sure the lender is in good standing.

Tom Pool, spokesman for the state Department of Real Estate, said state and federal licensing standards for mortgage originators are much stricter than they used to be, which “has weeded out most of the bad actors.”

Nevertheless, you can check a company’s or individual’s licensing status at the state Department of Corporations (www.corp.ca.gov) or the Department of Real Estate (www.dre.ca.gov).

Pool also recommends online searches at sites like the Better Business Bureau (necal.bbb.org) to see if the lender has been linked to bad practices or scams.

Too late?

Even though interest rates have inched upward in the last month, you’re probably not too late.

“It’s not worth losing any sleep over,” said Bankrate’s McBride. “Given the European debt crisis, (interest rates) can’t rise appreciably.”
On the other hand, the national mortgage bankers group predicts mortgage interest rates will “drift slowly higher” next year, leading to significant declines in refinance activity.

Above all, make sure a refinance is right for your situation.

“It’s a significant financial transaction,” said Edward Achtner, an Oakland-based regional sales executive for Bank of America. “If buying a home is the largest transaction a consumer embarks upon, a refinance is a close second. Do the research, evaluate the different options. Take your time and do not be pressured into making any decisions

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When an Adjustable Rate Mortgage Makes Sense

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When an Adjustable-Rate Mortgage Makes Sense

Locking in a historically low fixed rate might feel safer. But borrowers can save big on ARMs right now.

By Janice Revell, contributor, Fortune, September 3, 2012

FORTUNE — During the housing meltdown, adjustable-rate mortgages were vilified as a hallmark of irresponsible borrowing. Recently, though, they’ve been making a comeback, especially among affluent borrowers. This summer, for instance, Facebook (FB) CEO Mark Zuckerberg reportedly financed his home using an ARM with a rate of just 1.05%. Most borrowers can’t snag a rate remotely close to that. But many would still do well to consider an ARM right now — even if conventional wisdom says otherwise.

An adjustable-rate mortgage offers an introductory period in which you pay a lower interest rate than with a fixed loan; after that, the rate can fluctuate up or down. With rates near historic lows, the safety of locking in a fixed rate appeals to many borrowers. But they’re paying a premium for that security: The spread between rates on 30-year fixed-rate mortgages and the most popular ARMs now stands at about one percentage point, more than double the difference just five years ago.

That means that homeowners who are planning to either move or pay off their mortgage over the next few years can save big with an ARM. Take, for example, a homebuyer who plans to pay down an $800,000 mortgage. Currently the rate on the fixed portion of a 5/1 ARM — which is guaranteed for the first five years and adjustable once a year thereafter — is around 3%. In a typical 5/1 ARM, the maximum increase during the sixth year is five percentage points above the initial rate. Alternatively, our hypothetical borrower could opt for a 30-year mortgage that locks in an annual rate of about 4%.
MORE: Mortgage applications up, mortgages not so much

Fortune asked Greg McBride, an analyst with mortgage tracker Bankrate.com, to run the numbers on both options. To be conservative, McBride assumed the worst-case scenario with the ARM — one in which the rate shoots up to the 8% maximum in year six. Here’s what would happen: For the first five years, our homebuyer’s monthly payments on the ARM would be $3,373 — or $446 less than what he’d pay under the 30-year fixed mortgage. Over that period he’d save a total of $39,000 in interest and would amass $12,000 more in equity. After the initial five years the monthly payments under the ARM would balloon to $5,490. But it’s not until the seventh year of the loan that the savings garnered by the lower ARM payments during the first five years would be wiped out entirely. (This doesn’t factor in the mortgage-interest tax deduction, which would be greater on the fixed-rate loan for the first few years but higher on the ARM thereafter.)

If after five years, however, the rate on the ARM increased at a more moderate pace of one percentage point a year, the initial savings wouldn’t be eclipsed by the fixed rate until the 10th year of the loan. The bottom line: Unless you definitely plan to stay in your mortgage over the long term, it might pay to adjust your thinking.

–A former compensation consultant, Janice Revell has been writing about personal finance since 2000.

Downsizing the Jumbo Loan

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Downsizing the Jumbo Loan

By Vickie Elmer in the New York Times

WITH interest rates still low, many homeowners have been saying goodbye to their “jumbo” mortgages and refinancing into conventional loans. They may need to write sizable checks at the closing, but in the end they are likely to reduce their monthly payments while improving their cash flow.

“It’s an opportunity not to be missed,” said Melissa Cohn, the chief executive of the Manhattan Mortgage Company, adding that her customers like the idea of locking in a lower rate.

Jumbo mortgages, also called nonconforming loans, exceed $625,500 in high-cost areas like New York. Unlike conforming mortgages, they do not meet specific guidelines of Fannie Mae and Freddie Mac, which repurchase loans and resell them to investors. Because lenders assume more risk, interest rates for nonconforming loans are higher than for conforming.

These days the spread between conventional and non-conventional is 0.5 percentage points, on average, according to data from HSH.com, though if the jumbo loan was taken out during the financial crisis of 2008, it could have been up to 1.8 percentage points more.

To refinance out of a jumbo loan, most borrowers will have to put in extra money — sometimes $100,000 or more — to decrease the balance to below $625,500, or $417,000 in other parts of the country. Some, though, may see this as a sound investment.

“A lot of homeowners are sitting on cash, concerned about the stock market,” said Bob Moulton, the president of the Americana Mortgage Group in Manhasset, N.Y. “They get 3.5 percent-plus by putting it into their home,” he added, referring to the prevailing rate nationwide on a 30-year fixed-rate loan.

“If you don’t have a need for the cash — if your cash position is O.K. — then that’s the right decision,” he added.

Mr. Moulton says he has had several customers eager to buy down their mortgage balances. “When people are to the cusp,” he said, referring to borrowers’ balances near the cutoff for conventional loans, “I always bring that to their attention.”

Cash-in refinancing has remained popular as homeowners work to cut their debt levels. Some 23 percent of homeowners refinancing in the second quarter decreased their mortgage balances, according to Freddie Mac; in the fourth quarter of last year it was 47 percent. The agency provides a guide for consumers on its Web site.

Sheila Walker Hartwell, the owner of Hartwell Planning, a financial planner based in Manhattan, says homeowners with a good financial foundation could greatly benefit by moving to a conventional mortgage from a jumbo. She provided one scenario in which a couple pays in $75,000 when they refinance a $700,000 mortgage, and save at least $5,900 a year on interest based on a 0.33 percentage point reduction in their interest rate. They would need to earn almost 7.5 percent a year on that money to net the same amount from savings or investments, she said.

But Ms. Hartwell cautioned that when homeowners pay into their mortgages to build up equity, “the money’s not liquid,” or readily available. She said that she would prefer that her clients develop a savings and spending plan and make sure that they have a “contingency fund” with at least six months’ and sometimes up to 12 months of living expenses. (The 12-month fund is worthwhile when the economy is uncertain or if your job or industry seems less than solid, she said.) It’s not a good idea to deplete those funds to pay down your mortgage, even if the funds are earning next to nothing, Ms. Hartwell said.

Especially, Mr. Moulton added, “if they anticipate big expenses — college expenses, home improvement — or have other debts at a higher interest rate. Then they don’t want to do this.”

Another drawback, Ms. Hartwell said: Unless the length of a loan is reduced, each time you refinance, the mortgage starts again at the beginning and initial payments are almost all interest.

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Home Prices Signal Recovery May be Here

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Home Prices Signal Recovery May be Here

NEW YORK (CNNMoney) — A sharp boost in home prices during the spring could signal a recovery in the long-suffering U.S. housing market, according to an industry report issued Tuesday.

The S&P/Case-Shiller national home price index, which covers more than 80% of the housing market in the United States, climbed 6.9% in the three months ended June 30 compared to the first three months of 2012.

“We seem to be witnessing exactly what we needed for a sustained recovery; monthly increases coupled with improving annual rates of change,” said David Blitzer, a spokesman for S&P, in a statement. “The market may have finally turned around.”

Two other key indexes covered in the S&P/Case-Shiller report also showed gains. The 20-city index was up 6% for the quarter and the 10-city index rose 5.8%.

National prices were up 1.2% compared with a year earlier, and the 20-city and 10-city indexes also gained year over year. It was the first time all three measures showed positive annual growth rates since the summer of 2010, when generous tax credits for homebuyers were in place.

There have been several positive industry reports over the past several weeks. In July, new home sales were 25% better than a year earlier; existing home sales gained 10% year over year; and developers applied for 30% more residential building permits.

The steep increase in home prices “feels really good after six years of straight down,” said Mark Zandi, chief economist of Moody’s Analytics.

He cautioned that the results may overstate the case for the housing recovery a bit. The mix of homes being sold has changed lately, with fewer repossessed homes on the market. Those sell at big discounts to conventionally sold homes and had been propelling prices downward.

The home price improvement is expected to have a positive impact on foreclosure rates, according to Michael Fratantoni, vice president for research and economics for the Mortgage Bankers Association.

Foreclosures have already been falling and could drop some more if the upswing in home prices continues.

As home values increase, home equity rises, and fewer mortgage borrowers will be underwater, owing more than their homes are worth. That will give them an asset to tap should they run into a tight financial patch.

An improving housing market will also give homeowners more confidence in the investments they’ve made in their homes.

“There has also been a lot of concern about strategic defaults,” said Fratantoni. “That should ease now. When home prices go up, people have a financial incentive to hold onto their homes and they’re less likely to walk away.”

Rising prices are likely to push potential homebuyers off the fence, where many have been waiting out the price decline, according to Doug Duncan, chief economist for Fannie Mae.

“Their perception that we hit the bottom takes out the risk of buying into a falling market,” he said. “That should increase demand, particularly if they also believe that mortgage rates have reached a bottom as well.”

Each of the 20 cities covered in the report recorded a gain in June, compared with a month earlier. Detroit prices jumped 6% for the month, the most of any city. Minneapolis prices climbed 4.8% and Chicago prices rose 4.6%.

In Phoenix. home prices were 13.9% higher in June than 12 months earlier, the highest gain of any of the 20 cities covered.

Several cities were still in negative territory year over year, including Atlanta, where they were off 12.1%. New York prices were down 2.1% on an annual basis, and Las Vegas prices were 1.8% lower.

For Zandi, all the positive news on housing carries over to the rest of the economy.

“Housing is beginning to act as a tailwind for the recovery,” he said.

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Mortgage Closing Costs fell 7 Percent for Homebuyers

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Mortgage closing costs fell 7% for homebuyers

NEW YORK (CNNMoney) — Federal regulations are helping to significantly reduce the amount new homebuyers are paying come closing time.

The average cost of closing on a mortgage has fallen by 7.4% over the past year, according to a recent survey by Bankrate.com. At the end of June, a homebuyer looking to close on a $200,000 mortgage with 20% down paid an average of $3,754, $300 less than 12 months earlier.

Included in those costs are origination expenses, such as application fees and the cost of doing credit checks, and third-party fees, such as those paid for title searches and insurance.

The decline can be attributed to new regulations that require lenders to be more accurate when estimating closing costs for borrowers, said Greg McBride,

Bankrate’s senior financial analyst.

The regulation, which was put in place two years ago as part of the Real Estate Settlement Practices Act requires lenders to provide a “good faith estimate” of third-party fees that is within 10% of the actual amount the buyer will pay.

“The big drop in third-party fees indicates the lenders are doing a better job at estimating what the costs will be,” said McBride.
with scissors and the bogeyman probably aren’t keeping you awake at night, either.

The fact that everyone is scared to dabble in—much less commit to—housing makes it a close-to-perfect investment based on Mr. Buffett’s principle. But buying real estate is a good long-term investment for many more reasons, some of which have only become apparent in recent weeks.

The most striking: Housing prices rose sharply from April to May. The S&P/Case-Shiller Index rose 2.2% in 20 of the nation’s big cities. Prices shot up more than 3% in Chicago, Atlanta, San Francisco and Minneapolis. Even Detroit’s housing market scored a gain, inching up by 0.4%.

Nationally, the increase was the first in seven months. More importantly, the increase matched other data and empirical evidence this spring that foreclosures slowed and inventories were shrinking. Simple economics suggests that as the supply of distressed property slows, buyers will be forced into higher-price properties.

In addition, interest rates on 30-year fixed mortgages have tumbled below 3.5%. For those who can get credit, these aren’t just historically low rates; they are one-sided deals tilted toward borrowers.

Other good signs: Housing starts rose 6.9% in June. Home-building stocks are on the rise, with the Philadelphia Housing Sector Index up 27% so far this year. And for those who can invest in property, rents continue their ascent. Prices are at a 10-year high, with the median unit renting for $710 a month.

Real-estate website Trulia found that it is cheaper to buy than rent in each of the nation’s 100 biggest metropolitan areas.

In other words, if you can buy a home today, you can save the difference it would cost you to rent even if you stay in the home just five years. If you can buy a property and rent it, it is almost certain that the rent will cover the cost of the financing—and the property will appreciate.

Here’s where the fear comes in. From 30% to 50% of existing mortgages in the U.S. market are underwater, depending on the estimate. That means many borrowers are trapped in their homes and loans. They either can keep paying and hope prices will improve or walk away, putting downward pressure on home prices.

Foreclosure rates have leveled off, but market analysts believe an increase is likely.

Here’s why. Since the financial crisis, 3.7 million homes have been foreclosed on, but an additional 1.4 million remain in the national foreclosure inventory, according to CoreLogic, a real-estate research firm.

Finally, a housing recovery won’t happen, or could be snuffed out, by a rotten economy. There’s never been significant growth in housing with high unemployment. And as Dow Jones’s Kathleen Madigan noted, “Potential buyers must feel secure with their job prospects before they commit to long-term mortgages. Higher loan standards mean banks want to see an applicant’s solid income history before lending.”

There is plenty to be afraid of when it comes to home buying. But in the current investing climate, housing presents an attractive long-term investment that should hold steady or even have upside surprise in the short term.

Fixed-income yields have fallen to historic lows, and the stock market has traded in a range, rising and falling skittishly on jobs, growth data and the news from Europe.

Recently, I was forced to choose between renting and buying. I decided to buy because it offered immediate monthly savings compared to renting, not to mention a mortgage-interest deduction.

So this is at least one case where I’m putting my money where my keyboard is.

Mr. Buffett would remind us that investments of any kind are not without risk. Each should be considered with the investor’s time horizon and appetites. But he also has acknowledged that real estate is especially attractive when financing is cheap, there is pent-up demand and prices have been driven down by a spooked market. Put another way, it’s time to be greedy.

Write to David Weidner at [email protected]

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Will Short Sales Hit Homes Sales?

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Will Short Sales Hit Homes Sales?

By AnnaMaria Andriotis

Could a new government program to help distressed homeowners wipe out recent gains in home prices?

On Tuesday, the Federal Housing Finance Agency announced new guidelines that are supposed to make it easier for homeowners to sell their home in a short sale. In a short sale, a home sells for less than the borrower owes on the mortgage. In addition, the new guidelines, which kick in on Nov. 1, allow homeowners with a Fannie Mae or Freddie Mac mortgage to pursue a short sale even if they haven’t fallen behind on their mortgage payments but have a hardship, such as a job loss or divorce.

Consumer advocates say change will help some of the borrowers who’ve been unable to sell the estimated 11 million American homes worth less than the value of their mortgage, according to CoreLogic. However, not all homes would qualify in this new program.

And while the changes provide new hope to distressed homeowners, experts say they could negatively impact home prices in neighborhoods that get an influx of new short sales. A rise in short sales will result in “downward pressure on home prices until we clear out the majority of these distressed properties,” says Jack McCabe, an independent housing analyst in Deerfield Beach, Fla.

Home prices had been rising in recent months, a trend experts say is due to the limited inventory and the smaller number of distressed properties on the market. In July, median home prices were up 9.4% from a year prior, according to the National Association of Realtors. That marked the fifth back-to-back month of year-over-year increases in home prices — the longest streak since 2006. Inventory was down 24% from a year prior. And distressed sales—including short sales and foreclosures—accounted for 24% of July sales, down from 29% a year prior.

For its part, the NAR says it’s called for an expedited short sales process to help boost inventory. The FHFA says it expects short sales to settle at market prices and that they’ll help avoid foreclosures and long vacancy periods that result in declines in home values.

Still, data suggests that the impact on homeowners who aren’t in distress could be lower home values in the near term. Even if short sales fly off the market, they’ll likely go at a discounted price. According to the NAR, short sales sell at prices that are 15% lower than regular home listings on average.

Instead, the benefits for homeowners could be bigger in the long term. “It’s a better idea to clear out the backlog of distressed homes rather than delay the process in the name of supporting [home] values,” says Brad Hunter, chief economist at Metrostudy, a housing market research and consulting firm.

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Consumer Protection Bureau to Propose New Federal Mortgage Rules

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Consumer Protection Bureau to Propose New Federal Mortgage Rules

New federal mortgage rules to be proposed by the Consumer Financial Protection Bureau are designed to prevent a repeat of the foreclosure crisis.

By Jim Puzzanghera, Los Angeles Times, August 9, 2012, 9:00 p.m.

WASHINGTON — New federal rules would require banks to provide homeowners with better information about their mortgages to avoid costly surprises, such as sharp interest rate increases, and provide better service to help them avoid foreclosure.

The rules, to be proposed Friday by the Consumer Financial Protection Bureau, are designed to prevent a repeat of the foreclosure crisis. They track an outline released in April by the agency, which was created in 2010 in part to help protect borrowers.

The public will have two months to comment on rules, and the consumer bureau aims to make them final in January.

“From processing payments to evaluating struggling homeowners and helping them avoid foreclosures, the bottom line is to treat consumers fairly by preventing surprises and runarounds,” said Richard Cordray, the bureau’s director.

Some of the rules mirror requirements agreed to by large mortgage servicers, including Bank of America Corp., JPMorgan Chase & Co. and Wells Fargo & Co., as part of a $25-billion settlement with federal and state officials over foreclosure abuses.
The bureau’s proposed rules would apply to all mortgage servicers, with some exceptions for small companies, and focus on two areas: providing clear and timely information for homeowners about their loans and helping them avoid bureaucratic hassles.

Servicers would have to send homeowners a clear monthly statement with a breakdown of payment information and due dates; provide a warning 210 to 240 days before the first interest rate change on an adjustable-rate mortgage, along with an estimate of the new rate; give advance notice of plans to charge homeowners for property insurance if their policies lapse; and make a good-faith effort to contact borrowers who fall behind on their payments to tell them of ways to avoid foreclosure.

Foreclosure prevention is the focus of another set of proposed rules. They include acknowledging a request to fix errors or other complaints within five days, then conducting an investigation and providing those results in 30 to 45 days.

The rules also would require a prompt review of applications for loan modifications and direct access to mortgage servicers’ employees to better help borrowers.

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