Banks significantly tightened real estate loan standards
Report underscores need to use an experienced and diverse mortgage broker

U.S. banks dramatically tightened their standards for approving individual real-estate loans in the first quarter of 2007, the Federal Reserve said Monday.

At least 38% of banks surveyed made it harder to get a mortgage loan, the Fed said in its quarterly senior loan officer survey. Fifty-six percent of banks toughened standards for getting a subprime loan, the Fed found, while 46% of banks raised standards for obtaining a nontraditional mortgage. Meanwhile, 15% of banks made it harder to get a prime mortgage loan.

The Fed also said 34% of banks surveyed also raised standards for getting a commercial real estate loan.

Second-home snapshot

Vacation-home sales are up, while fewer are buying purely for investment

A sharp drop in investment-home sales offset a record number of vacation-home purchases to bring down the overall share of second-home purchases in 2006, the National Association of Realtors reported Monday.

The share of second-home sales was 36% of all existing and new residential real estate transactions in 2006, down from 40% of all sales in 2005, the group said.

Vacation-home sales went up 4.7% to a record 1.07 million homes in 2006 from 1.02 million in 2005, driven largely by demographic trends. Meanwhile, investment-home sales dropped 28.9%, falling to 1.65 million homes in 2006 from 2.32 million in 2005, according to the group's annual survey of investment- and vacation-home buyers.

The share of vacation-homes rose, making up 14% of all home sales, up from 12% in 2005. Of all homes purchased last year, 22% were for investment, down from 28% in 2005.
For comparison, primary-residence sales fell 4.1% during the time; in 2006, there were 4.82 million primary home sales, down from 5.02 million in 2005.

"We expected the drop in investment sales because speculators left the market in 2006, which caused investment sales to fall much faster than the primary market, but the rise in vacation-home sales is based on strong demographic and lifestyle factors, with only modest interest in renting their properties to others," David Lereah, the association's chief economist, said in a news release.

The median price of a vacation home was $200,000 in 2006, down 2.0% from $204,100 in 2005. Investment-home prices were also down, with the typical home costing $150,000 last year, down 18.3% from $183,500 in 2005.

"The drop in investment prices comes as no surprise, but for vacation-home prices to edge down in a record market is a bit puzzling," Lereah said. "It may result from a large dumping of inventory on the market by speculators, especially in the condo sector, with long-term, second-home buyers taking advantage of the glut and buying at negotiated discounts.

"Anecdotally, part of the drop in the median investment price results from investors shifting away from pricier markets like Florida, Nevada and Arizona, and into affordable locations in New Mexico, Idaho, Utah, Georgia, Tennessee and the Carolinas."
Of second-home buyers, eight out of 10 thought it was a good time to invest in real estate; 57% of primary-residence buyers thought the same.

Sales of vacation homes benefit largely from the country's demographics, because large numbers of consumers are in prime buying ages, Lereah said.

The profile of a typical vacation-home buyer in 2006 was someone 44 years old, with a median household income of $102,200. Typically, these vacation homes were a median of 215 miles from the owner's primary residence, though 42% of vacation homes were closer than 100 miles and 32% were at least 500 miles away.

While many of these vacation-home buyers are older than 50, those in their 40s may be driving the market in the coming decade, Lereah has noted.

According to the report, 79% of vacation-home buyers wanted the property as a vacation or family retreat, 34% wanted to use the property to diversify their investments, 28% planned to use it as a primary residence in the future, 25% were motivated by the tax benefits, 22% intended for a family member or friend to use the property, 21% said they bought because they had extra money to spend and 18% plan on renting the property to others.

The most popular location for the homes was in rural areas; 29% of the homes were purchased in the country. But 24% were located in resorts, 22% in a suburb and 10% in an urban area or central city. Most of the homes were detached single-family houses (67%), but 21% were condos and 8% were townhouses or rowhouses.

Homeowners Flooded With Unexpected Expenses

Recent rains raise the question: What if I had a credit line in place?

As many homeowners are discovering – and will continue to discover in the coming days and weeks – the damage caused by the torrential rains of April 15 and 16 is not covered under many insurance policies.

Unless a homeowner – perhaps one of your clients who is trying to sell a home – has full flood insurance, any cleanup and/or restoration work that he or she has to undertake will have to come out of the homeowners' pocket. Many flood/water exclusive policies are written specifically to free insurance companies from any kind of liability related to water damage caused by heavy rain.

Thus with many people facing huge and unexpected out-of-pocket expenses – ones that could possibly hold up the sale of a house – it is arguably time for some to revisit the idea of securing a home equity loan to pay for damage.

Many people have substantial equity and investment in their homes. The best way to protect that investment against emergencies of any kind is to have emergency money on hand. With a credit line in place, there is no such thing as an emergency that can't be met.

Housing starts, permits rise 0.8% in March

Conflicting views of whether housing market has stabilized

Curious report on MarketWatch today, based on a Tuesday estimate by the Commerce Department:

According to a story by Rex Nutting, construction of new homes increased 0.8% in March to a seasonally adjusted annual rate of 1.518 million, the highest level this year. Warmer weather is thought to be at the heart of the increase.

Building permits also increased 0.8%, reaching a seasonally adjusted annual rate of 1.544 million last month. Permits had fallen in 12 of the previous 13 months.

The figures were slightly higher than those expected by economists surveyed by MarketWatch. The median estimate for housing starts was 1.50 million, while permits had been expected to be at 1.52 million.

Housing starts are still down 23% from March 2006, while permits are off 26%.

However, the figures appear to show renewed optimism on the part of builders that the worst of the correction in the housing market is behind us. Many agree that month-to-month figures are too unreliable to make firm judgments based on one month.

"The freefall is over," Bob Walters, chief economist for Quicken Loans, told MarketWatch. "The steep plunge has now found a floor." He also noted that starts have been in the range of 1.5 million for five months.

Bill Hampel, chief economist for the Credit Union National Association, cautioned against overt enthusiasm, predicting the March figures "will be the highest we'll see for some time to come."

Hampel added that March's starts were boosted by favorable weather, and he noted that homebuilders are "very pessimistic." Last time anyone checked, though, the weather hasn't been all that warm, yet warmer weather is indeed on the way.

The government cautioned that the monthly figures are unreliable. For housing starts, the standard error is so high that the reported figure could be off by as much as 11% either way.

Meanwhile, the completion of new homes fell 0.7% to a seasonally adjusted annual rate of 1.63 million last month, an indication that builders are ramping down their inventories.
In a separate reports:

· Labor Department reported that consumer prices rose 0.6% in March, while core prices rose just 0.1%. Both figures measuring retail-level inflation were below expectations.

· Also Tuesday, the Federal Reserve said industrial output fell 0.2% in March as utility output plunged.

Like I have said previously in this space, mass media tends to overplay the down side to the current housing situation while failing to recognize the positives. The report by MarketWatch is a breath of fresh air, however tempered it may be.

Maximizing Your Mortgage's Rate of Return

Homes are for storing people and their possessions. Investments are for storing your cash!

Let's look at some examples. Keep these suggestions in mind:

· Separate equity for investment, not consumption
· Invest in moderate to safe investments
· Uncle Sam is your friend…use him
· Seek aggressive but conservative mortgage products.

Example 1

Assuming a borrower can afford the increased monthly payment, a 15-year mortgage is better than a 30-year mortgage…true or false?

Let's do the math:

· A 15-year payment minus a 30-year payment = $758.00
· Now invest the $758 and its additional tax savings into an investment account with a conservative rate (i.e. 6 to 8 percent). You could pay your home off in 13 ½ years or in 15 years with $25,000 to spare.

Example 2

A Tale of Two Brothers

A true story adapted from the book The Rules of Money

Brother "A" has a 15-year mortgage at 6.44 percent; 20 percent down payment.

1. $1,383 monthly payment ($1,227 monthly net after-tax cost)
2. Sends in $100 monthly to bank in effort to help pay off sooner

Brother "B" has a 30-year mortgage with ARM at 7.42 percent APR; 5 percent down.

1. $1,175 monthly payments ($799 monthly net after-tax cost)
2. Adds $100 to his $428 monthly payment savings and puts the $528 into an investment account earning 8 percent ROI.

Fast forward the tale:

Brother "A"

1. After five years: $14, 216 in tax savings; $0.00 in savings
2. After 15 years: $25,080 in tax savings; Owns the house; $30,421 in savings.
3. After 30 years: $25,080 in tax savings; owns the house; $613,858 in savings.

Brothers "B"

1. After five years: $22,557 in tax savings; $83,513 in savings.
2. After 15 years: $67,670 in tax savings; $28, 2019 in savings; $190,000 balance on mortgage; could pay off and own with $92,019 to spare.
3. After 30 years: $107,826 in tax savings; owns the home; $1,115,425 in savings!

One last thing: what if the brothers both lost their jobs?

Example 3

Nest egg economics

Let's look at leveraging home equity to gain just an additional $1,000,000 for retirement.

Pull $200,000 worth of equity out of your home and redeposit it in an investment account with a conservative rate of 6.75 percent.

· In 30 years, the investment account will be worth over $1.4 million
· After taking out interest payments and mortgage payments, you are left with a nest of just over $1,000,000.

Realtors Update

Using Equity In One Home to Finance the Next

We all know we are facing challenging times and must remain proactive if we hope to meet our business goals. Many homes listed for sale will not sell this year. If you, the realtor, have a client who is relying on the equity in his or her current home to use for the down payment on their next purchase, one of two things should happen:

Your client would need to access the equity through a credit line prior to listing the home or I can offer them a blanket loan, whereby we use the equity in the existing home to purchase the new one. This is available for a primary residence and the current home can only have one mortgage in place. If the current home doesn’t sell, your client may decide to rent the property for a period of time.

Here is an example:

Sales Price of New Purchase: $ 750,000
Appraised Value of Existing Property: $ 500,000
Less Existing Lien on Existing Property: $ 310,000
Total Net Value: $ 940,000

Total Net Value: $ 940,000
Program LTV (max 80%): 80%
Maximum Lien Amount: $ 752,000

Maximum Loan (cannot exceed $ 750,000
Purchase price)

Let’s get those listings closed! I am here to help you.

Patty

On the Record: Capstone President Tim Malburg

When an Appraisal Is Less Than the Purchase Price

Mr. Malburg talks to the New York Times' Jay Romano

By JAY ROMANO
Published: March 20, 2007

Q. What happens if the appraisal on a home being bought using a mortgage comes in at less than the purchase price?

A. "This can be a potential problem for borrowers,” said Tim Malburg, president of Capstone Mortgage Company in Wilton, Conn.

Mr. Malburg said that if an appraisal used in getting a mortgage is less than the purchase price, the lender may reduce the amount of money he is willing to lend. If that happens, the borrower will have to come up with a larger down payment.

For example, Mr. Malburg said, if the buyer of a home that costs $400,000 wants to take out a mortgage for 80 percent, the mortgage would be $320,000 and the down payment $80,000.

But if the appraisal indicates that the property is worth, say, $350,000, then an 80 percent mortgage would be $280,000 and the borrower would have to come up with a down payment of $120,000.

Mr. Malburg noted that while the lender might still be willing to provide a $320,000 mortgage on the property, doing so would mean that the loan-to-value ratio — $320,000 to $350,000 — would be 91 percent instead of 80 percent.

In such a case, he said, the borrower would probably have to buy private mortgage insurance, which is typically required for loans of more than 80 percent of the value of the property.

Mr. Malburg said that the borrower might also be able to take out a home equity loan for the difference in down payment – in this case, $40,000 — but that the interest rate on that loan typically would be one to two percentage points higher than the rate on the first mortgage.