Purchase Implosion: Pre-approval letters worth the ink? March 30, 2008
Nearly everyone has had a personal experience of a deal falling through via the other side of the transaction not performing. It is hard to swallow when you have no control over the other party or their financing efforts. Especially bad, the call to your client who is in boxes and ready to move within hours. It takes guts to make the call and is character building.
The dreaded phone call: “….hate to bring you bad news, but our transaction has fallen through, and ….”
Chew on this scenario:
A transaction is stopped in its tracks just hours before it is slated to close. Seller has already signed closing paperwork and escrow is waiting for lender documents to have borrower sign and then proceed to close the transaction as scheduled. Escrow is then notified that the deal is apparently dead. Why? Escrow is informed by the agents that buyer’s financing fell through. Buyer’s financing addendum gives the borrower x amount of days to obtain financing, which was written to expire the day of closing. As is tradition, the selling agent provided a pre-approval letter (not pre-qualification) at the time of the offer.
In a sentence in paragraph #2 of the Financing Addendum Contingency (NWMLS Form 22A) it states:
“A letter from the lender generated or dated at or prior to mutual acceptance shall not constitute a letter of loan commitment which complies with this paragraph.”
1) Should the listing agent and seller fight for the earnest money?
2) What do you find would be some of the transaction management pitfalls that could have been avoided?
3) Is the buyer fully in compliance or did they fall short of a duty to act in a timely manner. Time is of the essence.
Buyer’s question at signing March 26, 2008
A recent buyer asked us at signing (a day or two prior to closing):
“I’ve noticed that the fees charged by my loan officer are about $1,600 more than my Good Faith Estimate. I recall only being charged 1% loan origination. Is there any explanation for this?”
What are the re-disclosure laws (both state and/or Federal)? Obviously, this buyer was a bit under pressure and did not want to create waves to delay the purchase.
Sphere: Related ContentThe Baby or the Bathwater December 10, 2007
Are we throwing out a program that works, the FHA Down Payment Assistance Program, in this case the baby, while trying to fix the sub prime mess, the bathwater? I guess it all boils down to how valuable home ownership is and how well it helps drive a healthy economy.
A lot of realtors, including myself, have used an FHA non profit down payment assistance program (NDPA) with borrowers that want to own a home but can’t save a down payment fast enough to keep up with rising home prices. FHA programs, like Nehemiah or AmeriDream, allow more options for buyers, including the gifted down payment portion, and now that zero down payments are hard to find, this program is needed even more.
The non profit down payment assistance programs are going to be stopped in February unless Congress votes to extend the program. In the HUD Appropriations bill, congressional members are being influenced by a study done by HUD that shows that the default rate from the non profit down payment programs is 1% higher than other down payment assisted loan programs.
However, there is a further study by George Mason University that contradicts the HUD study and calls into question the validity of that statistics. For instance, the HUD sampling was limited to four US cities that had a higher than normal use of the programs and decreasing home values. Because of this study, the bill extending the programs may not pass.
The George Mason University study as well as the HUD bill is available by emailing me. It is long and takes time to get through, but here are the key findings, extremely edited!
1. 627,000 NDPA loans in 5 years.
2. National economic benefits as a result of these loans in the same time period is 4 times the estimated costs.
3. Those using this program had total wealth growth of 9.6 billion of this period.
4. NDPA homeowners contributed 228 million in property taxes in that time period.
5. NDPA homeowners generated 7293 jobs just in using more utilities due to their home ownership
6. Spending on household items created 60794 jobs, 1.8 billion in personal income, and 5.8 billion in total economic output.
Senator Patty Murray has voted against this bill possibly because of the influence of the HUD study. I hope she changes her mind. Since over 95% of all homebuyers using this program have not defaulted, we would be punishing those hopeful buyers and throwing out a wonderful and productive program.
Phinney Neighborhood annual home fair, Sunday, Jan 28th January 27, 2007
Phinney Neighborhood Center is hosting their annual home fair this weekend. This is a wonderful event with a lot of great information about home upkeep, upgrading, and overall design concepts. Several builders and architects attend this event and provide their expertise in a comfortable environment. One of my clients, Kirk Jolley, of Kirk Redo is usually in attendance as an exhibitor. He’s got great woodworking and finishing skills as I’ve seen his personal residence that he rebuilt after a former owner’s long neglect and I’ve seen many of his client projects, including the floor of my own home office - and he’s a great guy too! I’ve also volunteered in the past to help at the event as a member of the Phinney Neighborhood Association but sadly can’t make it to this year’s event. However, I do believe it is a great opportunity for people that are considering making changes to their home in the coming year to start getting educated about the process and to get some wonderful design ideas.
HOME DESIGN AND REMODEL FAIR : Imagine, Explore, Build
Sunday, Jan. 28, 2007, 10 a.m. - 4 p.m.
Phinney Neighborhood Center, 6532 Phinney Ave N.
Admission: $5 for PNA members, $8 for the general public, children under 12 Free
The 10th annual Home Design and Remodel Fair will offer local homeowners a chance to meet with trained professionals and get advice on remodeling and home improvement projects.
More than 75 exhibitors ranging from general and specialty contractors to landscape professionals to architects and designers will be on hand to offer advice and resources needed to complete any home improvement project. Many of the exhibitors have a “green” emphasis.
Presentations will also be featured throughout the day. Topics include everything from choosing a contractor to stocking your toolbox.
The presentation schedule includes:
10:30 Choosing & Hiring a Contractor
11:10 Remodeling for Resale Value
11:50 Financing Your Remodeling Project
12:30 Working with an Architect
12:45-1:15 in the Blue Room
Q&A with Around the Home & More KOL Radio hosts Kevin Liger & John Kappler
1:20 DIY Mini Home Inspection
2:00 Making the Most of What You’ve Got
2:40 Tools for the Homeowner
3:20 Design/Build: What is it?
Cocktail Party Primer October 13, 2006
I’d like to open this thread up to a conversation on the health of the Seattle market…
but there is a catch. I will not allow it to dissolve into a conversation about racism, liberals, RCG, or faith. If you’d like to have a reasonable intellectual conversation, you are more than welcome to participate. If you attack me, RCG, or any contributor, then I’ll happily delete your comment.
By the way, please consider this post the “anti-linkbating” post. Not only will I quickly delete any off topic comments, but more importantly, I will mark those comments as “spam”. That will allow me to ban your email, name, IP, etc. from the site after only a few off-topic comments.
Two days ago, Michael Lindekugel of Team Reba made a very interesting comment. No one ever challenged him on the merits of his argument, so I think it makes an appropriate starting point into a discussion on the health of the Seattle market:
It’s the hot topic at most cocktail parties. Is Seattle going to experience a bubble and burst? The short answer is no…..the long answer follows:
We experienced a busy market with a shortage of supply and increasing demand resulting in four or five offers and short “Days On Market” over the last few years. Prices are the highest in history. Despite the market of the past four or five years and the misinformation published in the local news papers and talked about by the “informed” gurus, Seattle is NOT hot compared to the rest of the state of WA and the nation. Most sources touting a hot market do not fully understand fundamental economics and finance and they do no research beyond reviewing statistics from the local Multiple Listing System (MLS) which provides only part of the picture.
About a year ago, the Seattle Times Sunday Edition published a study about the riskiest Metropolitan Statistical Areas (MSAs) showing Seattle is not hot and a bubble is not likely. Unfortunately, the study was already three months old! I and many other finance and economic professionals read the report soon after it was released. The mainstream media is usually late to the game and poorly researched. Economist and financial analysts have followed the underlying data of the study for many many months prior to the publication of the report. Economist and financial analysts have all been saying Seattle is not hot and a local bubble is highly unlikely.
OFHEO provides index rankings of States and Metropolitan Statistical Areas (MSAs), including the District of Columbia. In 2005, Washington State and the MSA of Seattle-Bellevue-Everett have moved up in the ranking. WA places near number 17 of the 50 states due to other MSA’s in WA and not Seattle. Bellingham, Olympia, Spokane, and Tacoma carried WA to a higher position in the rankings. Seattle experienced less capital asset growth (appreciation) than Bellingham, Olympia, Spokane, and Tacoma. If not for those cities, WA would be lower on the list. Seattle is expensive compared to income based on affordability indices. Seattle experienced very good capital growth over the last five years, but Seattle is not a hot market. Seattle was not a hot market.
San Diego, Sacramento, Oakland, Santa Ana, Nassau NY, Boston, Providence, LA, San Jose, SF, Edison NJ, Cambridge, etc. experienced hyper capital growth with no economic drivers indicating a sustained market. Many of these cities saw a large proportion of speculative flipping which is arguably bad for the local economy and community when initiated by the uninformed investors. Those hyper growth markets with a high percentage of speculators have been decimated. The speculators left town flooding the market with supply leaving homeowners with upside down loans.
Is it possible the mainstream news is creating some of the hysteria over a Seattle “hot” market? Buyers read the news of the “hot” market and begin to think they are going to miss the boat if they don’t act now. That goes for homeowners and investors. The market has a lot of dumb money investors. “Do you think this duplex is pretty?” does not constitute financial due diligence. Analyzing Capitalization Rates alone is not enough. Discounted cash flow yield must be calculated and reviewed against investing in all asset classes. Long ago I stopped counting the number of people who called saying they want to invest in real estate. They didn’t know why they should other than every one else is doing it. (Whether real estate is a superior investment over other asset classes is another discussion/argument entirely.)
What is a bubble? To say option loans will burst the Seattle “bubble” or “high appreciation” will burst the Seattle bubble is short sighted and akin to most of the mainstream news which is half researched garbage reported out of context based on old information. If it bleeds it leads. Many components impact a possible bubble. High appreciating MSAs are not necessarily at risk. Low appreciating MSAs are not necessarily immune. High incidences of Option loans or piggyback lending are not by themselves indicators of a bubble. National level capital asset growth (appreciation) is a function of three components (Liang and McLemore).
1. Inflation,
2. interest rates,
3. homeowner’s propensity to consume more housing with a paycheck.Since the depression, this country has not seen a decrease in the national median home price. Some MSAs have experienced local decreases. That can be verified from many government studies and many academic studies. Bubbles do appear locally. Real estate is a local market driven by local economic drivers. The probability of those three components having a simultaneous negative impact severe enough to cause a decrease in the national median price is small. Bubbles and stagnation are always local because of the fundamentals of local economies.
Inflation is a general rise in the price of all goods and services. As long as wages increase at the same rate or faster than inflation we feel no impact from inflation. Inflation outpacing wages increases the cost of housing and will have a negative impact on demand. Short term interest rates are a function of The Fed. The Fed has very little control over long term interest rates. Long term interest rates are a function of investor speculation about long term inflation through investment in the long term bond markets. The Fed might be saying inflation is a problem short term, but investor’s do not see it long term. We are in a unique time when there is a convergence of short term rates and long term rates resulting in an inverted yield curve several times over the last couple years.
Several studies suggest a 1% point increase in the 30 year mortgage rate can have a 10% purchasing power hit to first time homebuyers. That can have a trickle up impact on increasingly more expensive homes decreasing over all market demand. Our market consists of quite a bit of move up. Higher interest rates will have a negative impact on demand from a trickle up impact. Most research I have read recently suggests a 30 year mortgage rate of 7%-8% will show signs of an interest rate influence. If the homeowner has room to consume more of their paycheck on housing, then there is room to purchase a more expensive home. In Seattle, inflation is not out of control. Wages are increasing again; we have job growth; and 30 year mortgage rates are still below the historically average. Homeowners could probably consume additional income on housing.
The bubble study often cited (Van Akkeren and Ogishi) includes data on MSAs for:
-Appreciation and the acceleration of appreciation between periods reported from the OFHEO
-Labor market employment growth, unemployment, the difference between current unemployment and historical unemployment averages.
-Home affordability calculated from the median income, appreciation, 30 year fixed mortgage rates.The data is coupled with the concentration of mortgage risk from piggy back loans such as 80/20, 80/10/10 and new loan products that are negative amortization (Option loans) and the high use of interest only loans to create a list of MSAs most likely to experience a correction and the probability of that correction. (The Depression was caused in part by interest only mortgages. Fully amortized loans were introduced after The Depression to create a forced safety net. Interest only loans became popular again in the late 1970s)
Option arm loan programs are not as inherently risky as the general public believes them to be. The loans have a negative amortization cap of 110% of the loan balance. Since these loans are limited to 80% LTV, then the cap is 88% LTV based on the value at the time the loan is made. Loan characteristics do not appear to be risky at all (MBA & IndyMac, October 2006). The average
-LTV 73%
-LTV adjusted for OFHEO HPI is 65%
-Number of borrow ring for 2nd homes or investment 7%
Higher defaults rates occur when these loans are used in conjunction with more debt or piggy back lending. Piggyback financing greatly increases the risk of default (Calhoun, hidden risks of piggyback lending).While all this may seem very academic, the algorithms and statistical trends are pretty good predictors. In the most recent PMI Group study of all the MSAs, Seattle’s risk index is 158 or a 16% chance of devaluation. Historically, the Puget Sound doesn’t experience a decrease of capital asset values. The Puget Sound’s “down” market is usually a plateau. Seattle has a good economy. Seattle isn’t very volatile. The probability of loss of value is very low. The probability of a decrease in the capital growth rate is most likely resulting in a plateau. During a long holding period the risk is very small.
Will Seattle be OK? I believe the answer is yes for several reasons.
Real estate is a local economy driven by local economic fundamentals. Jobs are a big driver. We have good job growth. The Puget Sound is one of the few MSAs with current high tech hiring.
Our unemployment is still higher than our historical average. We are beginning to experience a job hunters market again. We have room to move toward lower unemployment.
Our economy is not based on a boom or bust economy dependent on oil or a similar industry like Houston.
No matter you read in the Seattle Times about Seattle being hot we are not. I haven’t read an economic, academic or government study that arrived at that conclusion. Again, we are expensive with a decreasing affordability index, but not hot.
The acceleration of capital asset growth or year to year capital asset growth is relatively low compared to the hot MSAs. Our capital growth rate is decreasing, but it is still higher than the national average. If we do fall we don’t have as far to fall.
Developers are policing themselves to decrease the number of speculative investors flipping property creating artificial demand and artificial supply shortages in the Puget Sound. The developers took note of hyper capital growth markets with a high incidence of speculation in Miami, San Diego, and Las Vegas. Many condo developments limit investor purchases to 10% of the total units for sale which is more restrictive than most lenders. Centex will not sell to investors. Developers are including special addendums. The buyer must sign a document stating the property will be owner occupied, will not be rented, and will not be resold for two years. I have seen a couple cases in which the flipper (and real estate agent) in the Puget Sound did not read the developer addendums. Upon the resale of the property in less than the restricted time period the flipper owes all gain to the developer and the real estate agent must pay back the commission! Bad agent. No martini.
Do you have data to suggest that something he says is wrong? Does he have the wrong definition of a bubble? I’d definitely be interested in hearing any reasonable and polite opinion on Michael’s comment! And finally, I suggest that you read comment 89, where Micheal addresses some of the deficiencies of his argument.
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