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Lenders stop conforming loans above $625,000 in July, home sale fall

Posted: 22 Aug 2011 03:30 AM PDT

Most major lenders stopped processing on loans over the conforming limit intended for sale to the GSEs. In July, both sales and prices declined statewide. Is there a connection?

Irvine Home Address ... 3742 CLAREMONT Irvine, CA 92614
Resale Home Price ......  $659,500

There was no help, no help from you (Thunder)
Sound of the drums
Beatin' in my heart
The thunder of guns!
Tore me apart
You've been - thunderstruck!
Rode down the highway
Broke the limit, we hit the ton

AC/DC -- Thunderstruck

The heartbeats of sellers are racing a little faster. Prices are falling and sellers are becoming more motivated to sell before prices fall further. The high end of the market has been thunderstruck. The conforming limit broke, and the market is hit by a ton of inventory. The high end collapse has finally begun.

New lower conforming loan limit impact on Irvine, CA

The above chart shows the distribution of home prices for all sales under $2M in Irvine, CA from 1/1/2010 through 7/31/2011. Irvine, CA is an expensive sub-market of an expensive region (Southern California). As a result, it is likely to feel any impact from lower conforming home limits more than most other places.

Based on the chart above, it's hard to argue that tighter loan standards and more expensive debt will not impact the upper third of the Irvine home market. Just wait until the increase in the conforming limit enacted in 2008 is completely removed and every loan over $417,000 is subject to jumbo financing. That will impact over half of the Irvine market.

With that in mind, we’ve identified two potential price ranges that could be most impacted by the new limits. The green band represents homes that have selling prices where a 3.5% down payment represents a loan between the old limit ($729,000) and the new limit ($625,000). These properties represent 13.0% of all home sales in Irvine, CA.

For the sake of clarity, this is not to say that 13% of sales used FHA financing. But this is the price range were FHA financing will no longer be bidding on properties. Fewer bidders make for less buyer competition and lower prices.

For the taxpayer’s sake, let’s hope that not many of the buyers in this price range are using only a 3.5% down payment. Those buyers are likely to be underwater soon as we predict continued downward drift in higher end home values in Southern California. These buyers represent one end of the spectrum.

FHA buyers in this price range are candidates for strategic default. They will almost certainly submerge beneath their debts, and they may not breath the air of equity for many years.

realtors have been creating a false sense of urgency with these buyers cajoling them into buying by stoking fears of being priced out. I pity those who fall for that bullshit. Any of those buyers will be priced-in for years trapped in their homes as prices fall to the new equilibrium of affordability.

On another point (but not the end, which would be “all cash” buyers) of the spectrum, we have buyers who put down 20%. At current Irvine, CA valuations, this is a substantial down-payment of around $170,000. For this level of royalty, we’ve used a purple band in the chart above. Using a 20% downpayment, 8.4% of sales in Irvine, CA would be impacted by the gap between the old and new conforming loan limits.

The purple band is the market segment most at risk. The buyer pool in this segment is very thin, and the supply is very large.

These are estimates — buyers in the green and purple bands have a few options. In order of long-term common sense for the buyer they are:

1. Pay less. Leverage seller fear that the loan limits really will reduce demand and correspondingly demand a lower price.

For sellers who are not delusional, the reality of the situation should increase their motivation. Sellers have stoked fears in buyers for years with nonsense like "buy now or be priced out forever." The reality today is sellers are facing lower future prices. If they don't sell today, it will be several years before they can obtain today's prices again.

2. (tie) Put more down. Buy down the loan amount so that it becomes conforming.
3. (tie) Delay the purchase. The price-lowering impact from this change will be slight, but will occur over time. With an ongoing slow economy and prices above rental parity, there are no upward drivers for Irvine, CA home values.
4. Use “creative” financing. Pay the asking price but increase your monthly carrying cost for the term of the debt obligation.

I never advise anyone to use any form of creative financing. It is an option one should never consider.

Even though the higher limits don’t go into full effect until 1 Oct 2011, the delays involved in funding a loan will require that banks and brokers use the new limits as soon as possible.

I have heard reports from buyers that B of A and Wells Fargo have already stopped underwriting loans above $625,000 except as jumbo loans. It is likely the dramatic drop in sales in July was exacerbated by this fact.

Mitigating factor: long-term rates, paradoxically, plunged after the US downgrade. One can argue that it makes little sense that a downgraded asset class would be seen as safer after the downgrade, but that’s what Mr Market has said. Because rates are so low, investors will likely be interested in more non-comforming loans as the government makes its slow but necessary disengagement from being the mortgage underwriter of last resort.

Southern California home sales and prices fall again in July

August 15, 2011

Home sales in Southern California fell to their lowest level for a July in four years -- though the decline from a year earlier was the smallest in 13 months. The median price was down 4% to $283,000.

This is July. House prices and sales typically do not decline in July. What is going to happen this fall in winter if we are seeing declining sales and prices in July?

The drop in sales from June was more pronounced, especially for houses that cost more than $500,000,

I believe this is directly related to the change in the conforming limit. High end sales were weak before because (1) prices are too high relative to incomes, (2) asking prices have been declining as a sign of seller capitulation, and (3) an abundance of high-end inventory greatly exceeds the depth of the buyer pool.

In reality, what is prices as high-end homes here in Orange County are not really high end. Many houses in many neighborhoods were elevated to high-end price levels from the foolishness of the bubble, and prices are yet to fully deflate. The market for high-end houses only appears weak because so many houses are delusionally priced as if they are high end when they really aren't. The correction in pricing is one of seller's perceptions. The market will force reality on the delusional masses in time.

as the job market sputtered, economic uncertainty intensified and some potential homebuyers got cold feet, real estate information service Dataquick said.

A total of 18,090 new and resale houses and condos sold in Los Angeles, Riverside, San Diego, Ventura, San Bernardino and Orange counties in July. That was down 11.9% from 20,532 in June and down 4.5% from 18,946 in July 2010, according to San Diego-based DataQuick.

Those are very bad numbers. The declines this fall and winter should be substantial, particularly at the high end.

“The latest sales figures look a bit worse than they really are, given this July was a fairly short month, but they still suggest some potential homebuyers got spooked,” said John Walsh, DataQuick president.  “Reports on the economy became increasingly downbeat and, no doubt, some people fretted over the possibility the country would default on its obligations.”

July was a fairly short month? Last I checked the calendar, July still had 31 days. WTF is he talking about? John Walsh's consistent market cheerleading has all but eliminated his credibility as a market commenter. He has embraced his role as a realtor shill.

Some wise renters likely did chose to sit on the sidelines, but the drop in sales is more likely a reflection of the fact that the buyer pool is diminished, and prices are too high relative to incomes in most of Coastal Southern California.

Prices also continued to slide. The median, the point at which half the homes sold for more and half for less, has declined year-over-year for the past five months. It has been unchanged or lower than a year earlier each month since last December, when it posted a 0.3% annual increase.

Take a look at the bar graph above again. The first and second quarters of the year are the two which historically post the largest gains in prices, yet prices have declined steadily during that time. There are no signs sales or prices will pick up during the fall and winter when they usually decline.

“If there’s a shred of good news in the data it’s that last month’s sales weren’t much worse than a year earlier,” Walsh said. "For the first time in many months, we get an apples-to-apples comparison to year-ago sales, given that in July 2010 the market lost its crutch -- federal homebuyer tax credits.

Yes, we have our first apples-to-apples comparison, and according to Dataquick's data, sales were down 4.5% from last July's weak numbers and prices are also lower. Most market analysts noted the figures for June and July 2010 were very low because the summer demand was pulled forward to April and June 2010 due to the tax credits. Therefore, we are below what was already and artificially low number. That can't be good.

Ponzi borrower gets over two years of squatting

Today's featured property falls in the no-man's land above the new conforming limit. FHA buyers can no longer afford this property with 3.5% down.

The former owner managed to quadruple their mortgage, then they got to squat for over two years when they couldn't make the payments. Rather than selling the house for a half-million dollar gain and walking way with a sizable check, they endured a foreclosure, they are flat broke, and their credit is trashed.

  • This property was purchased on 2/20/1987 for $170,000. The owners original mortgage information is not available, but it's safe to say it was less than $170,000. In all likelihood, they put 20% down back in 1987.
  • On 10/1/1999, they refinanced with a $292,000 first mortgage. They had already gone Ponzi with over $122,000 in mortgage equity withdrawal.
  • On 3/30/2001 they refinanced again with a $340,000 first mortgage.
  • On 3/15/2002 they obtained a $75,000 stand-alone second mortgage.
  • On 3/17/2003 -- do you see a yearly pattern here? -- they refinanced with a $448,000 first mortgage.
  • On 1/26/2004 they got a $520,000 first mortgage.
  • On 2/25/2005 they were approved for a $130,000 HELOC.
  • On 5/14/2007 they obtained a $554,000 first mortgage and a $240,700 HELOC.
  • Assuming they maxed out the HELOC, total mortgage debt was $794,700.
  • Total mortgage equity withdrawal was $624,700.
  • Assuming the NOD followed after 90 days of delinquency, total squatting time was at least 27 months.

Foreclosure Record
Recording Date: 04/22/2011 
Document Type: Notice of Sale

Foreclosure Record
Recording Date: 08/11/2009 
Document Type: Notice of Sale  

Foreclosure Record
Recording Date: 05/06/2009 
Document Type: Notice of Default

The bank finally took this one back on 5/25/2011 for $492,109. They dropped their opening bid to find a third-party, but nobody stepped up to buy the place. The lender must really believe they have a gem as they are pricing it about 30% higher than they paid at auction. If they get anywhere near their asking price, the flippers missed a good deal. Given the plethora of negatives with this property, I doubt they get over $600,000.

This property is available for sale via the MLS.
Please contact Shevy Akason, #01836707 

Irvine House Address ...  3742 CLAREMONT Irvine, CA 92614  
Resale House Price ......  $659,500 

Beds:  5
Baths:  4
Sq. Ft.:  2754
Property Type: Residential, Single Family
Style: Two Level, Other
Year Built:  1970
Community:  Westpark
County:  Orange
MLS#:  S660785
Source:  SoCalMLS
Status:  Active
On Redfin:  82 days
This Two Story Home Features Five Bedrooms and Four Baths, No Mello Roos, Low HOA Dues And An Association Pool And Spa, Tennis Courts And Clubhouse.
Proprietary IHB commentary and analysis

Resale Home Price ......  $659,500
House Purchase Price … $492,109
House Purchase Date .... 5/25/2011

Net Gain (Loss) .......... $127,821
Percent Change .......... 26.0%
Annual Appreciation … 123.0%

Cost of Home Ownership
$659,500 .......... Asking Price
$131,900 .......... 20% Down Conventional
4.19% ............... Mortgage Interest Rate
$527,600 .......... 30-Year Mortgage
$129,520 .......... Income Requirement 

$2,577 .......... Monthly Mortgage Payment 
$572 .......... Property Tax (@1.04%)
$0 .......... Special Taxes and Levies (Mello Roos)
$137 .......... Homeowners Insurance (@ 0.25%)
$0 .......... Private Mortgage Insurance
$60 .......... Homeowners Association Fees
$3,346 .......... Monthly Cash Outlays

-$422 .......... Tax Savings (% of Interest and Property Tax)
-$735 .......... Equity Hidden in Payment (Amortization)
$197 .......... Lost Income to Down Payment (net of taxes)
$102 .......... Maintenance and Replacement Reserves
$2,488 .......... Monthly Cost of Ownership 

Cash Acquisition Demands
$6,595 .......... Furnishing and Move In @1%
$6,595 .......... Closing Costs @1%
$5,276 ............ Interest Points @1% of Loan
$131,900 .......... Down Payment
$150,366 .......... Total Cash Costs
$38,100 ............ Emergency Cash Reserves
$188,466 .......... Total Savings Needed

First-time homebuyer’s presentation 6:30 Wednesday, August 24, 2011

Everyone is invited to our first-time homebuyer presentation. Put it on your calender for Wednesday evening. I look forward to seeing you there.

real estate home sales

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