The Foreclosure Crunch

This is part Three in a Four part series of articles detailing the changing mortgage market.

The Foreclosure Crunch

The Foreclosure Crunch is closely related to the LTV Crunch.

In fact, both crunches fuel on each other.

I would suggest you first read the LTV Crunch before you dive into this easy concept.

Now where to start?
Hmmmmmm .....

Let's start with the 3 TRILLION in Adjustable Rate Mortgages that we know are just about ready to change, or recast in the next year. That's a huge number! And yes, it is a national number but it is going to have an enormous impact of home loans in here in Contra Costa. I mentioned we know these loans are set to change but what does that mean?

As an example, let's say you financed a couple of years ago. The best rate and term your broker found you was 5.625% fixed for 3 years (or 5, 7, or perhaps 10). It was fixed at a time in history where the rates were the lowest. That's the good part. the bad part is that the loan now is set to adjust to the current rate environment. And rates are higher now than they were then. That means the monthly mortgage payment is going to go up. How much? On a POA it could be as much as double or triple! Other loans might be a bit more manageable.

Like explained in the LTV Crunch, and the Credit Crunch, these borrowers may not be able to refinance into anything! When that happens they can either:

• Live with it and try to meet their obligations,
• List their home for sale,
• or fall behind and go into Foreclosure
  

I can tell you that many of the people I have dealt with are already strapped for disposable income. Trying to keep your head above water is a temporary situation at best. If that payment continues to rise what do you think is going to happen?

Our local housing market is somewhat crowded already. How long do you think it will take a homeowner to sell right now? Not a pretty picture is it?

That leaves Foreclosure.

But let's just say you have an ARM.
You also have a great job, plenty of cash, and overall you are doing just fine.
Maybe you last refinanced or bought with an equity position of around 20%?
This possibly can't effect you - can it?

Wrong!

Try this...

1. Go to google maps and pull up your property.
2. Now draw a circle 1/4 mile around your home.
3. Now count the number of homes in that circle.

If any of those homes in that circle sell for under market value, go under, REO or sell at auction. your home just lost value as well. If it loses too much your ability to refinance into something manageable may be compromised no matter what YOUR personal financial situation is.



How about those people on the fringe of your circle? Their values are related to those 1/4 mile further away, and so on, and so on.
So really, a foreclosure many many miles away could domino into your home!
Bummer, eh?

"Yeah Mike, but I live in an upscale neighborhood. We don't have those kind of people around here."
Wrong again.

I did a little research locally.
I went to the County Records.
I asked for a list of homeowners who...

• Live in a single family home (no condos)
  
• In the Lafayette, Orinda, Moraga, Walnut Creek, Alamo, Danville, Pleasant Hill and Concord area.
• Who have an Adjustable Rate Mortgage at least 3 years old with A Paper lenders.
• I also limited the search to the first 1,500 names.
  

Surprise!
My list started in upscale Lafayette (just because that's what I listed first) and never left!

WOW!

So if you think your neighborhood is safe, if you think you are safe, consider yourself now informed.

It's not all bad news though.

I've said it before and I'll say it again,
"If homeowners are proactive now, they can navigate a soft landing. If they are not, they could find themselves in situations outside their control that could lead to personal financial disasters like bankruptcy and foreclosure."

If you do not know what kind of a mortgage you have, if there is any chance at all, I urge you to seek out a professional review ASAP. Only a Professional Mortgage Planner will be able to give you an objective opinion on where you stand.

The LTV Crunch

This is part Two in a Four part series of articles detailing the changing mortgage market.

The LTV CRUNCH

L.T.V. is simply an acronym for Loan to Value.
This is a surprisingly simple computation resulting in a percentage.

Let's assume you have bought a home valued at $800,000.
To buy that home you took out a loan for $640,000.
Your LTV is going to be 80% - easy right?
We took the loan amount and divided it by the value.

LTV has a cousin. CLTV - the C standing for "Combined".
That brings the other loans you might have into the equation, loans tied to the property like a Line of Credit.

Using our example, let's now assume you have a 1st Mortgage of $640,000 and a HELOC (Home Equity Line of Credit) for $80,000.
Now you owe $720,000 on your $800,000 home.
That's a CLTV of 90% right? Following so far?
Pretty easy stuff.
Now we're going to twist it a bit.

The Maximum LTV or CLTV is determined by the Guidelines.
The Guidelines are a set of rules detailing all the parameters of what loans the lender will do.

"Who cares what the Guidelines say?"
For one, the Underwriter who approves your loan does.
Underwriters live by the Guidelines.
To paraphrase the heavy metal band "Faith No More" They care a lot!

And to make matters worse, I have news for you. The Guidelines are changing.
They are getting tighter and tighter.
A year ago, a typical Guideline might have said something akin to "The maximum LTV on this product is 80% with a maximum CLTV of 100%"
To a loan officer that means this program will allow an 80% first mortgage and a 20% second.

That was then - this is now.

That same text might have a completely different tone today.
"The maximum LTV on this product is 80% with a maximum CLTV of 90%".

That doesn't sound so bad does it?

But wait there's more! (one of my favorite infomercial lines)

The value on your home is determined by the sales price of others around it.
That's called the Comparison Approach of Appraisal.
This is an important concept.

Going back to our example.
Your home was valued at $800,000 and you had a CLTV of 90%.
Let's now assume you need to refinance.
Your present loan is about to recast and your payment is going to go up.

The appraiser comes in, does his thing, and comes back with a value of only $750,000!
Why?
The other homes in your area that have sold in the last 3 to 6 months, sold for less. That's why.
Your home value is a direct result of the recent sales prices of other like homes in your area.

Important Concept #2:
As the value of your home decreases, your LTV increases.
Conversely, if your home value increases - your LTV decreases.

But I digress, let's go back to your refinance.
The appraisal comes back at $750,000 and now your CLTV is not the 90% it was but instead it's 96%. The aforementioned Guidelines for the loan that you are applying to clearly state a Maximum CLTV of 95% or worse yet 90%.

The result? - You cannot qualify for that loan and must find another loan program, another alternative, or live with it. This is because of two things. The guidelines changed, and foreclosures and financially distressed homeowners in your area have lowered the value of your home by selling at prices lower than your market value. Both items clearly outside of your control.

The Moral of the Story:
What's going on around you, in the country and in your neighborhood, no matter what your personal financial situation might be, can have drastic implications on you and your financial situation.

I am an optimist. I look at this as an opportunity for those that are prepared to rise above.
I have been recommending to all my past clients to review their mortgage plans, examine their goals and needs, and make adjustments to those plans sooner than later, if need be.

The Credit Crunch

You may hear from time to time about the Transparency of Real Estate.
There are people and companies marketing this term daily.
It refers to the general idea of the borrower or clients ability to see and know what is happening "behind the scenes".

I'm all for that!

In the broader sense, I like to see behind the scenes in the greater mortgage world.
I'm one of those types that wants to know how a company is doing.

• Are they in good financial health?
• Do they have great customer service?
• Or are they hurting and teetering on the brink?

Many times the things I see as a Mortgage Broker go virtually unnoticed by the general public.
One of which is the tightening of credit guidelines across the board.

Welcome to Part One - The Credit Crunch!

Make No Mistake!
This will and does effect everyone, no matter how good or how poor your credit is.

WAMU (Washington Mutual) issued a statement to the press recently that went unnoticed by the mainstream. In that statement, they said they were "emphasizing higher-quality loans to boost earnings and cut risk after its home loans unit lost $113 million from January to March."

I can see why it went unnoticed.

Here's what you need to know:
Just how much are they "emphasizing"?
How about 70%? Yeah - 70%!

Let's put it this way.
WAMU is one of the biggest lenders nationwide.
The loan you qualified for to buy your home, or the loan your 99 neighbors have is no longer available - period!

How will this effect you?

Follow the bouncing (snow) ball here...

• Maybe not you, but when any of your 99 neighbors need to refinance in the coming months they are going to be in for a little shock.
• They will not qualify for a refinance - plain and simple.
• They will be forced to keep their loans.
• Their payments will increase (3 trillion ARMS are set to recast in the next 18 months).
• They will be forced to try and sell.
• The market will not be able to absorb the new inventory at the prices they need to sell for.
• Your neighbors will go into foreclosure.
• The value of your home is determined by the sales (comps) of others like it in the neighborhood. When those houses sell due to hardship they are not selling at top dollar are they?
• This drives down home values in even the best neighborhoods.
• When the values drop, so does another key factor in the mortgage equation, Loan to Value
  

And that's part 2 of this series... The LTV Crunch

Median Home Sales broken out by city for both Alameda and Contra Costa County.

Click on the image to enlarge and see the entire report.

Items of Note:

• Alameda County UP 2.39% from a year ago.
• Contra Costa County DOWN 1.74% during the same time.
• Oakland sold the most units for Alameda County at 275 for a median price of $499,000.
• In Contra Costa, San Ramon sold the most units at 220 with a median price of $734,500.
• The largest percentage median gain in Alameda was Union City at + 26.49% over the year.
• Contra Costa County saw Moraga homes rise 41.13% over the year.