It has taken me several months to compose this post and I apologize for the long story.  I needed to make sure I was writing with a clear head because every time I came back to this event I could feel myself getting angry all over again as I relived the entire disaster, but I feel so strongly that this needs to be told.  Yes, I will name names because this is a true story of actual events.

While working with a buyer recently, I had the misfortune of also working with Prospect Mortgage in Campbell.  It turned out to be the worst experience I have ever had for any transaction.

My buyer had already met with and been pre-approved for his financing by Carey Atwood (NMLS#312243) of Prospect Mortgage before meeting with me for our buyer consultation.  I felt that my client had built a relationship with Carey and it wasn’t my place to jump in front of that to recommend someone new.  I should have suspected that something was not right when Carey misspelled our client’s name several times on various email and correspondence.

Once we made an accepted offer on a property, I kicked off the process for removing contingencies — ordering inspections and telling Carey to get his financing lined up and the appraisal ordered.  In most cases, I am usually called within a couple days by an appraiser telling me he/she will be doing an appraisal, and they like to ask questions if there is anything in particular they should be aware of (that effects the property value).  Almost a week goes by without hearing anything so I called Carey to check on the appraisal — I was given an excuse about how it must have gotten lost in the system!

The lack of communication from Prospect Mortgage amazed me.  Carey rarely if ever called me, I always had to call him.  He didn’t like to return phone calls, instead preferring to write an email.  So now I realized that I needed to constantly monitor his side of the transaction — was the appraisal ordered, when is it scheduled to take place, where are we with the loan application review and verification of income or assets, etc.  His job is basically to get the loan approval so we can remove our finance contingencies and move forward with drawing up the loan documents.

Most appraisals come in exactly at the offered price (don’t get me started on that “miracle”).  I have had some appraisals that come in 3%-4% lower than the offered price, so I need to kickoff an appraisal dispute process in order to make sure my clients are protected.  In this case, we get word from Carey that the appraisal came in $15,000 lower than the offered price (less than 1.5%).  I flipped out!  Who does this kind of thing?!  This never happens.  That’s such a small number on a $1M+ property.  After I pushed Carey to get to the bottom of it, he tells me the appraiser made a typo — it was supposed to be at our offered price!  Don’t you think he should have fixed that before sending it out to me and our client?

Ok, now we’re back on track, or so I thought.  The overall financing for this transaction was a $729,000 first loan, a piggyback equity line second loan for about $80k, and the rest made from the buyers cash down payment.  At this point we’re approaching the time to remove our finance contingency.  Essentially, once this contingency is removed, if my buyer cannot complete the sale then the seller has the right to keep the deposit money and sell to another buyer.  You can see where this is going, can’t you?

Making sure we are good to move forward, Carey tells us we are “Good To Go” on financing, the loans are in place and we are free to remove contingencies.  Sure enough, 2 days later Carey tells us his $80k piggyback second loan has disappeared.  The lender won’t approve this loan.  I was irate!  This has NEVER happened when I have used my referred loan agents.  Never!

Reviewing the situation — we are 2 weeks away from closing, $80k short of the purchase price, and $30k of my clients money at risk if we cannot close.  Carey is useless finding another solution.  After about 10 days go by where we poured over second sources and multiple solutions, my client reluctantly asks a family friend for a personal loan to replace the $80k and we’re back in business.

Now we go back to Carey at Prospect for the original $729k first loan and again Carey tells us we are “Good To Go”.  So we begin to put all the pieces in place, get agreement from the seller to close a little later than originally scheduled and then Carey sends an email — their loan rate-lock on this loan has expired and the cost of extending it was something like $5,000.

I flipped out, again.  At this point my buyer is exhausted, wants to give up, walk away, and sue everyone involved so I had to pull out the big gun to take care of this.  I went to my broker, who has high-level connections within Prospect, and told him how Prospect is a bunch of incompetent liars who have screwed this entire transaction from the start and now expect my client to pay $5,000 for their mistake.

Suddenly, I began seeing more email communication from Carey than ever before and names I’ve never seen included on the CC list which I assumed were stakeholder executives within Prospect.  Then a miracle happens, we get a 20-day rate-lock extension at no cost.

I’m confident we’re on track and everything is lined up to close in 2 days.  Carey calls again — the Prospect underwriter is looking for the section 1 termite certification.  There is no termite report, my buyer waived that inspection and the purchase agreement specifically made no mention of termite inspection or report — I yelled at Carey again to fix yet another Prospect screwup.  He gets it fixed and we are finally able to close.

In conclusion, Prospect Mortgage and Carey Atwood in particular rarely delivered on anything they promised, they missed many deadlines and stretched the timelines way beyond anything I have ever seen, and worst of all, they always had an excuse for how someone else was to blame for the situation.

My lessons learned:

1) NEVER again work with Prospect Mortgage on any transaction, period.

2) I need to be more forceful and direct with my clients when they tell me they are already working with a loan agent they know.  Not to say I don’t trust whoever they are working with, but if I have never worked with him/her before then I still want my clients to meet one of my recommended loan agents so I have a quick backup plan if anything goes sideways.

-Mark

There are a few changes coming early this year that will
impact specific real estate markets or price points across the Bay Area.  Yesterday’s WSJ reported that the FHA
(a type of government-backed loan program) is running short of their reserves
so they intend to increase their loan placement fee to 2.25% (from the current
1.75%).

What does this mean? 
If you get an FHA loan, you will need to pay a higher fee to “buy” the
loan.  For a typical $500k house
with only 10% down, your loan fee just went up to $10,125 from $7,875.  It is probably not enough to crash the
housing market, but it will price some buyers out who will have to delay their
purchase.

Recommendation: If you are likely to use an FHA loan —
meaning you have less than 20% for a down payment or you have credit issues
that make a conventional loan rate very high, then I would say you should move
quickly to find the right house and get an offer accepted before FHA fees go
up.

-Mark

The mortgage markets are tightening daily – this is nothing new because it has been front page news since August, 2007.  For homebuyers, this has had the effect of 1) generally higher interest rates, 2) higher FICO credit scores needed to qualify for a loan, and 3) a need for higher down-payments — this has especially impacted first time home buyers.

However, there is a sign of hope known as the FHA (Federal Housing Administration) bringing great news to both buyers and sellers.  The FHA is a government-backed loan program that has not been used much in California in the last 10 years since normal retail banks were offering the best mortgage programs to the public.  But now these same retail banks are stepping away from risk, FHA programs are making their way back as a great option for homebuyers.  Let me show you how.

Using FHA may help get around many of the problems buyers are having with typical retail loans today.  FHA does not have a high credit requirement so low credit scores may be accepted.  FHA loans can go up to 97% loan to value ratio, so buyers can get into a home with a low down payment.  FHA loans also go up to $729,750 on a single loan and the interest rates are very competitive, around 6.25% today.

These new FHA loans do have some restrictions, but nothing that should scare anyone from using them to buy the home you want.  You need to have 2 years continuous employment, any late payments on your credit report will need to be explained in a written letter, and you need to wait 3 years after a foreclosure to try to use an FHA loan for a new purchase.  On the down side, FHA loans do require a 0.5% per year mortgage insurance payment and 1.5% origination cost at the time of purchase.  You also need to consider that since this is a government-backed program, allow for a 60 day close instead of 30 days because there is more “process” involved.

Out of what we are seeing in the housing market today, the FHA program is a very important piece and we believe this will begin to repair the market.  If you believe you are out of the housing market because you only have 5% or 10% saved as a down payment, you now have other options.  If you are a seller of a home that is not moving after being on the market for a long time, it may be wise to consider concessions that will let buyers qualify for a loan on your home instead of reducing the price.

-mark

If you have an unused home equity line but have plans to use that money for something in the near future, right now may be the time to take some action.

Home equity lines of credit (HELOC or ELOC) are a great way of tapping into the equity in your home to make improvements like remodeling or landscaping.  Unfortunately, it has become more common over the past 10 years to buy consumables or even pay off credit cards with ELOCs since the interest rates are much lower than credit cards.  Time Magazine reported that Americans tapped into the equity in their homes at an astounding rate from 2004-2006:

As the credit market gets tighter, equity lines are the first to feel the crunch.  These credit lines are the banks most risky notes because if the home they are connected to goes down in value, it is possible that the homeowner will not want (or be able) to pay.

We are now seeing banks taking some surprising actions on existing equity lines.  One client of ours who was not using her $100,000 ELOC received a letter telling her that the equity line has been closed for no reason.  I have also heard that other lenders have suddenly reduced the equity line limit to the existing balance, which means you cannot draw any more money.  These moves will reduce the bank’s risk.

So, what should you do now?  If you are planning a project that will need the money from your equity line, you should immediately check the status of your ELOC.  If it is still available, it may be a good idea to write a check against the ELOC and deposit into your savings or money market account.  I know, you are paying interest on the ELOC and not even using the money.  However, if the credit market continues to tighten, it is possible that your lender will reduce or remove your ELOC before you have a chance to use it, and you are going to face the fact that you might need to find another way to pay for your remodeling project. 

-mark

Friday I saw 2 articles (Wall Street Journal front page, and San Jose Mercury Business section) that highlight how we have seen a slide in the average homeowner equity as a percent of mortgage.  Meaning, forty years ago, it was likely that a homeowner of a property valued at $50,000 had a loan of only $10,000, thus having 80% in equity. 

These articles are trying to point to a slide in housing prices as the primary reason for this phenomenon.  I think the price of housing is just one of many factors.  We should be looking to the lending standards for the true cause.  For the past decade, the traditional 20% down payment which dominated the housing industry since 1945, was replaced by 10%, 5% or even 0% down payment standards.  This led to the greatest number of real estate sales peaking in 2005 as 7.2 million homes were sold.

In addition, there has been a huge growth in “interest only” loans as an overall percentage of loans taken out on new purchases.  Naturally, this means that the homeowner is not paying anything against principle so unless the home grows in value; the homeowner has no way to effect the equity position of their home.

Combining the volume of sales using less than 20% down and the “interest only” loan practice, it should be no surprise that we are shifting toward higher loan-to-value ratios.  I don’t believe these newspaper stories are accurately reporting the cause, instead, they choose to ring the alarm bell on declining home values.  Unfortunately, this is typical for today’s news environment.

On the other hand, paying down your mortgage may not be the best use of your money, at least for some people.  Since the interest rate on your mortgage is about 6.5% and this interest is tax deductible, there is a growing set of investors who are looking to invest money they would use to pay down the principle into a higher return than 6.5%.  I’ve recently read “Missed Fortune 101” by Douglas Andrew who puts together some interesting theories around this approach.

-mark

The Office of Federal Housing Enterprise Oversight
(OFHEO) today announced it has temporarily increased limits on
conforming loans offered by
government-sponsored enterprises, Fannie Mae and Freddie
Mac, from $417,000 to as high as $729,750 in fourteen counties
in California for loans originated between July 1, 2007 and Dec.
31, 2008. Fannie and
Freddie are reported to be working out new underwriting
standards and expect to begin offering the new loans
soon.

 

Also, on Wednesday, the government raised the conforming
loan limit for mortgages guaranteed by the Federal Housing
Administration, and has begun offering the maximum limit of
$729,750 for 14 California counties, up from $362,790, for loans
originated between now and Dec. 31, 2008.

 

The Fed’s economic stimulus package approved
earlier this year called for temporary increases on
conforming and FHA loan limits to allow troubled
borrowers to refinance out of sub-prime loans and make it easier
for many new buyers to qualify for mortgages in high-cost areas,
particularly in California where home prices remain
among the highest in the nation.   

 

To view a list
of the new FHA Mortgage Limits by county, go to:

FHA Loan
Limits by County

 

For a list of
the proposed loan limit changes for Fannie Mae and Freddie
Mac, go to California Association of Realtors (CAR).

 
 

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