Laguna Beach Real Estate

OK – so who writes this stuff anyhow?

Coming out of Washington, two professors from George Washington University have identified a phenomenon called “cognitive resource depletion” as the reason why homebuyers make bad loan choices. Apparently, after the exhaustion experienced from finding a home in Laguna Beach or any other area, our brains just can’t effectively handle all the loan choices available and we choose high risk loans as a result.

Really?

As they report in the LA Times, “Shopping for a home and choosing between alternative features can deplete individuals’ cognitive resources, resulting in sub-optimal home-financing decisions….”

Wow…so we are more capable of choosing between a gas and electric stove, and less effective at monitoring the financial choices for our families or our wealth buiding.

I guess the professors over at George Washington University haven’t met any of my clients. I think that you are a bit smarter than they give you credit for. Perhaps they need to talk with the scientists that study the awesome capacity and power of the brain.

But there could be another advantage here. If you chose an option arm loan, adjustable rate loan or the like, and are now finding that you cannot refinance because the loan rules have changed in part by the greater credit crises, changing lender and government guidelines, or your home has lost value, perhaps you can blame the loan on a “disease” and a government program will surface to assist you! 

Anyhow, one thing that they do mention in this report which I do agree with is that you should obtain a pre-approval before you start your home search. This has nothing to do with the size or effectiveness of your brain; it is simply a time-saver in this new era of underwriting guidelines.

New Listings Over the Weekend:

There are no pictures available for this one yet, but may be something our investors would want to look at. It is described as two charming cottages on one lot in the heart of the village. The 2bed/1ba is rented for $1900/month; the other unit is a 2bed/2ba and us currently owner occupied. Priced at $1,298,000.

New Listing: 1175 Coast View, Laguna Beach

Priced at $2,595,000

Remodeled down to the studs

3200 sq. ft – 5 beds/4ba

New Listing: 1715 Ocean Way, Laguna Beach

Priced at $9,250,000

3000 Sq.Ft. – 3 Beds/4Baths

Steps to surf and sand

New Listing: 1100 Marine, Laguna Beach

Value Priced at $3,400,000 – $3,900,876

First time on the market in North Laguna

3291 Sq.Ft.-3Beds/3Baths

As always, give us a call, or shoot an email if you have any questions or need additional information.

Until next time…

A few weeks back we wrote about one frustrating Laguna Beach home purchase where the buyer was inundated with last minute underwriting conditions resulting in what we called the “loan approval decathlon” and a delay in the closing of the home. What was made clear with lending in our current credit climate is…”it ain’t over ‘till it’s over!”

The situation was frustrating for all parties. Including, it seems, the lender.

Tips that we took away from that experience were to avoid, if possible, removing any contingencies relating to your loan from the purchase contract. For example:

• We know that lenders have ordered second appraisals, even after the first one has been approved. Therefore, try to keep your appraisal contingency on the purchase contract until the loan has funded;
• We know that they could pull a second credit report right before the loan funds; therefore, be certain that there are no changes to your credit. If they do pull a second report, you want the credit profile to look similar. No new accounts, no major increases in your loan or credit card balances, etc. Now, you will probably not be able to avoid removing this one since you do have control over your credit history…just keep it clean!
• We know that they may re-verify your down payment and reserves. Be sure that your paper trail is accurate, and that you keep the documentation proving these assets. Again, keep it clean – you have control over this.

Now, we have some additional information from our associate over at Bank of America. This information is very helpful. It is a lender’s perspective as to why loans seem so hard to get. Read on…

A Lender’s Perspective

Compliments of Kevin Budde, Bank of America

One of the most regular comments we hear from agents and borrowers is that they believe lenders don’t want to make loans. It has become common place for many last minute underwriting conditions to be added to loans. We are even hearing about lenders who have issued written loan approvals only to have the approval pulled back days later. Sometimes, even after the buyer has removed loan contingencies, the approval is rescinded. What is going on and why is it so hard to get loans through the system?

There is a war going on between the U.S. government and the lending industry. Due to the financial collapse of FNMA and FHLMC the government was required to step in and take over these two housing giants. FNMA just required an additional $11.8 billion dollars of new capital to keep them afloat. The U.S. government is trying to stem these losses by making all of the lenders buy back loans that were sold to these two agencies. If government auditors can find any discrepancy in the file they issue a repurchase agreement to the lender who in turn needs to use their capital to buy the loan back. In response to the increased buyback requests from the government lending institutions are pressuring their underwriters to make sure not one piece of documentation is missing from a loan file prior to the closing of the loan. This often results in conditions that don’t make any sense to the borrowers and agents and can cause major upset prior to closing not to mention closing delays.

In 2009 Bank of America was requested to buy back $425 billion of home loans from FNMA and FHLMC. In 2010 the number is supposed to double. In the first quarter of 2010 Wells Fargo set aside $2.6 billion in reserves just to pay the legal bill for fighting the government and their buyback requests. The pendulum has swung from lenders making practically every loan four years ago to the extreme opposite making getting a home loan a very harrowing experience for the buyers, to say the least.

Is there anything you as agents can do to help make the borrower’s experience less daunting? Absolutely there is. Have all of your clients be thoroughly pre-approved prior to putting them in your car. Unfortunately there are many versions of what a pre-approval entails. Every day we cross pre-approve borrowers for REO and short sale properties. We see regularly the poor job and lack of documentation that made up the pre-approval. We ask for supporting documentation from the buyer only to find out they don’t qualify at all. Had we not been asked to step in and cross qualify the client that escrow would have collapsed shortly.

So what can be done to make sure the very best of efforts is being put forth? One, call the lender that issued the pre-approval letter and ask, “Did you collect income and asset documentation and review it with an underwriter to determine the accuracy of the qualification?” Two, allow time for the lender to take these steps in order to better prepare everyone. We are still asked to write pre-approval letters by talking to the client on the phone when the purchase contract is being written as everyone is in a hurry. This process doesn’t cut it in today’s difficult lending environment. Remember, if the borrower did not submit income and asset documentation to the lender for review then the pre-approval letter in your hand isn’t worth the paper it is written on.

Are you one of the many sellers whose home has not yet sold, but you are excited to close escrow on your next purchase?

Sellers in this quandry often face the decision of using their personal savings to meet the minimum required down payment in order to close the new purchase, and then refinancing after their existing home sells in order to replenish their savings and reduce their mortgage payment. The problem with this has been that the cost of refinancing could run into the thousands.

The other option is to wait on the new purchase until their home sells. In this market, that could take a few months depending on several factors. And, for those that are looking at all of the great inventory choices for Laguna Beach Homes for Sale, you may not want to risk missing out on that perfect home that has just hit the market.

Now, according to information from Kevin Budde from Bank of America, there is a third option. 

If you are able to use your savings to close your new purchase now, you could possibly recast that loan once your present home sells. Depending on the amount used, your payment could be lower.

Let’s see how this could work:

If you were purchasing a home at the price of $500,000 and had an amount in savings equal to 10%, or $50,000, you may be able to close your new purchase (depending on lender guidelines, etc.) with a loan of $450,000.

Then, when you sell your existing home, lets say that your proceeds were $100,000. You could use $50,000 of this amount to replenish the money that you used from savings, then apply the additional $50,000 to your mortgage through a recast, reducing that balance to $400,000 and thus reducing your monthly mortgage payment.

This is just another option to consider. If you believe that you could benefit from this, be sure to check with your lender to get all the details in relation to your personal financial scenario.

Here is the full information from Kevin Budde of Bank of America:

Recasting of Amortizing Loans  

A recast is a modification of a loan that can be completed when a large sum of money is applied to principal. A recast occurs when the principal balance of a loan is reduced and the subsequent payments are calculated using the lower principal balance. The recast does not shorten the term of the loan; however, it does lower the amount of the payment and the principal balance of the loan.

As an example, if a buyer who’s existing home hasn’t sold and was using the proceeds for the down payment, may choose to close escrow on his new purchase using funds from savings. Once his home for sale closes he will want to replenish his savings and use the rest of the proceeds to lower the principal balance to the originally planned loan amount. Most borrowers are under the belief they will need to refinance the existing loan and apply the additional proceeds in order to lower the monthly payment. This is where recasting becomes the solution.

If the borrower were to refinance they would incur thousands of dollars of costs. In addition, the interest rates may be higher which would also be a problem. By requesting a recast from the servicer of the loan the borrower is able to lower his monthly payment and not have to be concerned with costs or higher interest rates.

Recasts are permitted on FNMA and FHLMC loans. Recasting is not permitted on FHA or VA loans. Typically, one recast is allowed per year and no minimum principal reduction amount is required.

Has the Mortgage Pendulum swung too far in the wrong direction?

We have all heard the cautions of tightening lending standards. Most homebuyers in today’s real estate market have braced themselves for the adventure that has become the loan underwriting process. The “old rules” of “easy” lending that have plastered the news, targeted as being the culprit of our current economic situation, have been replaced by “new rules” which the big banks have promised are here to stay in the quest for more favorable lending practices. But how good can the “new rules” be when a buyer needs to scramble for $270 after putting over $200,000 in escrow to purchase their dream home in Laguna Beach? Will the “new rules” squeeze the financial middle class out of the real estate market?

For one recent Laguna Beach Home Buyer, what should have been an easy loan decision ended up resembling something akin to a 3-ring circus. As reams of documentation were sent and re-sent to satisfy a seemingly endless demand for loan conditions, and as promises of full loan approval and loan docs were issued and retracted, the buyers started to wonder why they were messing with a loan at all when they did, in fact, have access to the cash available to close the purchase without the assistance of financing.

The lender’s promise is to “be with you all the way”…it may be wise for a home buyer to find out what type of journey the lender has planned.

Tale of a Laguna Beach Home purchase

The home to be purchased was priced just over $1,000,000 and would be owner occupied. They put a 20% down payment into escrow and sought an 80% LTV loan of just over $800,000. It is important to note that the loan amount they were seeking is above the loan limits for government-incentivized programs. Their down payment funds were the result of $220,000 proceeds from the home that they just sold and closed. There was no question about where the down payment money came from.

The borrowers had good credit scores, well above 700; the primary wage earner has held the same job for over 19 years with a reputable company and it was clear that the amount of money he earned was sufficient to repay the loan. So what was the problem?

The part of the process that became most daunting for the lender, one of the five major banking institutions, was the question of reserves. Lenders want to be assured that borrowers have enough available cash in reserves to repay the loan for a period of time in the event of unforeseen circumstances. The underwriting guidelines for this loan required that the borrowers show an amount equal to 20% of the loan amount, or just over $165,000. This amount covers almost 30 months of mortgage, tax and insurance obligations.

So, to purchase a home valued at just over $1 million, this borrower needed to have close to $400,000 of cash…near 40% of the value of the home. 

Some may believe that this is fiscally responsible in light of our current financial situation. However, the scramble for “qualifying” reserve funds bordered on ridiculous.

It’s important to note that these borrowers have over $1 million in a 401K plan; however, required some paperwork and a few weeks to obtain. In this lender’s eyes, the delay in access deemed the funds not liquid and thus could not be used as proof of the required reserves. 

So what did the lender decide was acceptable proof of the $165,000 “liquid” safety net?

• A percentage of the $50,000 college fund established for their kids;
• A portion of company stock options (valued at almost $100,000) available to the borrower only during certain times of the year;
• Money from their recent tax returns of almost $15,000 (good thing they purchased during tax season!);
• Money in a liquid savings account of almost $5000;
• Money they could borrower from a Line of Credit from another of the large banks of which they would need to go through a re-approval and funding process;
• A cash advance loan from a Credit Card;
• Cash obtained from their overdraft account;
• Documentation for an insurance claim for jewelry that was stolen of which payout was expected at some point in the future;
• A refund for $270 obtained from overpayment on their auto insurance policy (yes, really – this was needed for approval!).

Mounds of paperwork and proof were collected, sent, and then re-sent to various underwriters and supervisors who reviewed the loan file for approval. Even when one underwriter accepted the documentation, another underwriter was at liberty to un-accept that same documentation and ask for even more in order to satisfy their own additional requirements.

After a while, it was as if nobody wanted the “buck” to stop on their desk. It was a hot potato scenario for a very cool loan.

What will strengthen Real Estate recovery?

As people continue to look for the bottom in housing prices and a recovery in the mortgage industry, it seems logical that we will not see it until the mortgage and lending industry finds a better way to distribute funds. Most of the lending and real estate home sales in the first quarter involved loans at government-supported levels. Government stimulation and support lessened risk and increased rewards for the banks.

Home buyers in Laguna Beach, where sales prices tend to be greater than $750,000, are often choosing non-bank financing to purchase their home. Overall, 41% of Laguna Beach homes sales since January 1, 2010 were accomplished using all-cash, private, or “other” financing. As the price tag of the home increased, so did the use of non-bank financing. When homes sold for $3 million or more, 61% of buyers avoided the banks. For Laguna Beach real estate priced over $5 Million, buyer’s took a 75% vote of no-confidence by avoiding bank financing.

Will a cycle of fear of accountability, paper-intensive qualification, avoidance or delay of lending decisions, and extreme auditing continue to muddle the lending process resulting in extreme delays to our economic recovery? Will these delays keep home prices down or even drive them down further as more buyers refuse to participate in the Loan Paper Decathlon? Will there be a chasm of home ownership where only those that can afford to pay cash, or those that can qualify for loans at government-incentivized dollar amounts, benefit from the American Dream of home ownership?