What the Federal Reserve’s Actions Mean

The Federal Reserve is facing a difficult but necessary transition from activist investor to pulling back its involvement and allowing higher short-term rates when the economy can stand on its own.

Last week the Federal Reserve took a small step toward reducing its involvement by raising the discount rate by .25% (The discount rate is the interest rate charged to commercial banks and other depository institutions on loans they receive from their regional Federal Reserve Bank’s lending facility). The Fed did recently indicate that the move might be coming, yet the timing of their announcement was surprising to many.

At the start of the credit crunch in mid 2007, nearly one-third of the U.S. lending mechanism was frozen. To increase their liquidity, banks had the option to access the Discount Window at the Federal Reserve (Federal Reserve Banks offer three discount window programs to depository institutions: primary credit, secondary credit, and seasonal credit, each with its own interest rate. All discount window loans are fully secured.) However, because costs for these funds were high AND repayment had to be done within 28 days, most lenders were unable to utilize this option. As a result, the Fed held an emergency meeting, lowered the Discount Rate and extended the repayment period to 90 days. These changes made the Discount Window option a viable solution for lenders and helped curtail the severity of the mortgage meltdown. Last week’s announcement reverses those emergency measures.

When making this change, the Fed noted that the continual improvement in financial market conditions gave them the foundation for this move. The Fed also said that they do not anticipate this raise to lead to tighter financial conditions for households or businesses nor does this move indicate any change in their outlook for the economy or for monetary policy.

However, as the Fed makes changes, the government backs out of Mortgage Backed Securities (MBS) purchases and slows down stimulus programs, we continue to assess economic growth and inflation concerns.

With that in mind, one of the most popular measures of inflation within the U.S. is the Consumer Price Index (CPI). The CPI measures the estimated average price of consumer goods and services purchased by households. This index rose by 0.2% for January, less than the 0.3% expected. With the publishing of the January results, the year-over-year CPI is at 2.6%, below expectations of 2.8%. The more closely watched Core CPI (which strips out food and energy costs), actually fell by 0.1%, below expectations of a 0.1% rise. The last time Core CPI showed a negative monthly reading was 28 years ago. This helped to drop the year-over-year Core CPI rate to 1.6%, a bit below expectations of a 1.8% rise.

These results show that, for the time being, inflation is a non issue. However, it will likely become a factor in the next year or two. And, the best hedge for inflation is to fix as many costs at today’s prices as you can. A home purchase today with a historically low mortgage rate allows buyers to fix the price of their home and the associated financing costs. We will continue to keep an eye on this index and other economic indicators.

Mortgage lenders pursue homeowners even after foreclosure

Excerpts from an article on CMN Money.com, on February 2010:

As terrible as it is to lose your house to foreclosure, at least it’s a relief to put your biggest financial headache behind you, right?


Former homeowners may still be on the hook if there’s a difference between what they owed on their mortgage and what the bank could sell it for at auction. And these “deficiency judgments” are ticking time bombs that can explode years after borrowers lose their homes.

It can even happen to people who got their bank to approve them selling their home for less than it is worth.

Vanessa Corey, for example, short sold her Fredericksburg, Va., home in April 2008. She and her husband built the house in 2004, but setbacks, both personal (divorce) and professional (housing bust), made it impossible for the real estate agent to keep her home. So she negotiated the short sale and thought that was the end of it.

“My understanding was that the deficiency was negotiated away,” she said. “Then, last November, I got a letter from a lawyer telling me I owed my lender $65,000. I had to declare bankruptcy. There was no way I could pay it.”

Many homeowners are now in the same boat. And not just those who took out bigger loans than they could afford or who did so called “liar loans” where they didn’t have to verify their income.

Because of falling home prices, borrowers who always paid their mortgage but who have run into unforeseen circumstances — like unemployment or a job transfer — can no longer sell their homes for what they owe. As a result, they are being forced to short sell or foreclose and are getting caught up in deficiency judgments.

“After the banks foreclose, it’s very common now to have large deficiencies with houses not worth the balances owed,” said Don Lampe, a North Carolina real estate attorney.

Whether banks can and will pursue deficiency judgments depends on many factors, including what state the borrower lives in and whether there’s a second mortgage or other liens. But if borrowers ignore the possibility of deficiencies, it could haunt them.

“Once they have a judgment, they can pursue you anywhere,” said Richard Zaretsky, a board-certified real estate attorney in West Palm Beach, Fla. “They can ask for financial records, have your wages garnished and, if you fail to respond, a judge can put you in jail.”

In the case of foreclosure, lenders can pursue deficiencies in more than 30 states, including Florida, New York and Texas, according to the U.S. Foreclosure Network, an organization of mortgage law firms.

Some states, such as California, are “non-recourse” and don’t allow deficiency judgments. But, even there, if the if the original loan was refinanced, some or all of it may be subject to claims.

Deficiency judgments on short sales and deeds-in-lieu can happen in many more places. In these cases, extinguishing the debt is often a matter of negotiating with the bank.

But even when lenders are willing, many borrowers may not be aware that they have to ask for release. So, if you are pursuing a short sale, be sure to ask the bank to release you from any further obligation.

Ticking time bomb

What can be scary is that the judgments don’t have to be obtained immediately. Lenders or collection agencies may wait until debtors have recovered financially before they swoop in. In Florida, the bank can wait up to five years to file. Once the court grants a judgment, the lender has 20 years there to collect, with interest.

It doesn’t have to be a large amount of debt for a lender or collection agency to come after borrowers. Richard Varno and his wife short sold their Nashville home back in 2004 after he lost his job.

It wasn’t until 2008, when the second lien holder asked him for $25,000, that he realized he still was liable.

“I told them, ‘Hey, you guys released the title,'” he said. “As far as I know, I’m off the hook.”

He wasn’t. Releasing title does not necessarily end the debt. It’s complicated because of variations in state law, but, generally, a mortgage has two parts: a pledge of collateral, represented by the home, and a promise to pay off the loan.

Lenders may release property liens in order to facilitate short sales without releasing borrowers from their obligations to pay under the promissory notes. The secured debt can convert to an unsecured one after the sale.

Lenders are also very inconsistent. One of Zaretsky’s short-sale clients was ready, willing and able to pay, but the bank did not even ask; another lender always reserves the right to pursue the deficiency.

Strategic defaults

Sometimes lenders go after borrowers walking away from their homes if they have other assets, according to Florida real estate attorney Larry Tolchinsky.

“Banks are pulling credit reports to see if it’s a strategic default,” he said. “If you’re behind on all your other payments, you’re okay. But if you’re not, they’ll come after you.”

If borrowers have any doubts about their risks, they should seek legal advice. Or, at least, call non-profit organizations such as NeighborWorks for advice. According to Doug Robinson, a NeighborWorks spokesman, its counselors always try to negotiate away deficiencies when they facilitate short sales or deeds-in-lieu.

“We don’t favor any short-sale contracts that leave any deficiency that can be pursued,” he said.

New Good Faith Estimate Regulations

January 1 marked the implementation of the new Good Faith Estimate (GFE) that resulted from the Department of Housing & Urban Development’s (HUD) reform of the Real Estate Settlement Procedure Act (RESPA).

Here’s a snapshot of the updated GFE:

  • The new GFE provides clarity about locked terms. If the buyer is locked, the expiration date is specified. If they aren’t locked, they know it and know when they must lock by in order to obtain the rate disclosed on the GFE. The new GFE also provides an expiration date for the estimate and is only good if the loan funds by that date.
  • The new GFE lumps all fees together regardless of who pays them so the buyer can quickly see the total costs of the transaction but will need further documentation in order to determine his/her true out-of-pocket costs.
  • The loan originator is responsible for all fees that are not disclosed; even if they underestimate the fees, your buyers don’t take the brunt of that mistake. As a result, mortgage advisors will naturally include on the estimate any possible fees that could be incurred so as to avoid underestimating and paying those costs themselves.

Under these new guidelines, the numbers from the GFE that the buyer was provided are compared with the final numbers on the HUD-1. If these numbers do not match up, or stay within the variance allotted by law, the lender is held personally accountable for the difference in cost.

While the new form was created to offer more clarity to buyers, there are still some instances where there can be some confusion.

For example, let’s assume a lender includes a $450 fee for the appraisal on the GFE form. Once the appraisal is reviewed by an underwriter, the underwriter may call for an appraisal desk review which carries an additional cost of $200. If this unanticipated $200 charge was not disclosed on the GFE form, the lender is required to pay this cost. As you can imagine, this can become quite costly for a Mortgage Advisor.

One way around this personal expense for the Mortgage Advisor is to include a $200.00 line item on the GFE for an appraisal review. And, if it turns out that an appraisal review is not required the borrower will not pay that cost (the new regulations allow the HUD-1 to be less than the GFE, but not more). However, a different lender that the buyer is considering may not include an appraisal review line item in their initial GFE. As a result, the Mortgage Advisor may appear to be $200.00 more expensive than the other lender.

When in doubt, encourage your buyers to talk to their lenders to ensure they understand the listed fees and any variances among lenders.

Here are a few more considerations associated with this regulation change:

  • Your more experienced buyers may be expecting to receive a GFE when they get pre-approved for a loan. Due to the many variances in costs associated with a loan, we will not issue a GFE until buyers are in contract. We will be able to provide them estimates of the costs and fees of their expected loan amount, but it will not be in the form of a GFE.
  • In the few instances where there are changes to rates or fees (e.g., if not locked when original GFE was provided or the borrower requests changes – in writing) the lender is authorized to change the settlement variables from the original GFE if the client signs the “Change of Circumstance Affidavit” at least 3 days before the loan closes. In these cases, the updated GFE must be provided to the buyer within three days after receiving the information or request. The basis for the revision must be documented and retained for at least three years after settlement. NOTE: The GFE cannot be updated to adjust fees that are not relevant to the changed circumstance.
  • Due to these regulatory changes, we require a firm estimate of final title and escrow costs (doc prep, wire fee, endorsements, copying, etc. . . ) within 24 hours of opening escrow. The final HUD-1 title and escrow fees must not exceed the estimate that the lender provided to the buyer in the GFE. If they do, the lender must personally pay for that difference.

Making Sense of Loan Modifications

Losing one’s home is a gut-wrenching experience. It’s something no one should have to go through. Now, sadly, many, many people are having to do just that. In many cases, however, there is another answer.

The Home Affordable Modification Program, or HAMP.

Part of the Federal Government’s economic stimulus plan, HAMP is an option that has yet to pick up a head of steam. It’s possible that it hasn’t gotten the necessary publicity, which is a shame, because keeping homeowners in their homes is vital not just to their well-being, but to the well-being of our economy.

Here’s how HAMP works:

Not a refinance, which replaces your loan with a brand-new mortgage, a loan modification happens when your lender reworks the terms of your existing loan. Generally speaking, this lowers payments and makes the home more affordable for you. Often, the lower payments are the result of a lower interest rate, an extension in the loan term, a reduction in principal, or any combination thereof.

If your home is your primary residence and the balance of your first mortgage is less than $729,750, then you may qualify for the program. Additionally, you’ll have to demonstrate that you’re facing hardships that are affecting your ability to make payments on your mortgage. From there, your lender will ask for documentation about your income, bank statements, as well as other financial data. You’ll also be asked to complete a Hardship Affidavit, in which you’ll describe extenuating circumstances with which you’re dealing.

“I’m doing just fine with my mortgage payments. Why is this important for me?”

Why? I’ll tell you why. The prospect of tens of thousands (yes, that many) homes suddenly appearing on the market is a pretty gruesome specter for our economy. Part of the problem of “shadow inventory” that we mentioned several weeks ago – a tidal wave of foreclosed homes entering the marketplace – would be a crushing blow to a real estate market that is only just showing signs of recovery.

Also, unoccupied homes are blights on communities. Too many can splinter a neighborhood, driving down everyone’s property values — not just those that are empty. And make no mistake: this isn’t just a problem of lower-income communities. No. Foreclosure is just as much of a problem in higher-end neighborhoods.

As Bloomberg reported late December – Homeowners with mortgages of more than $1 million are defaulting at almost twice the U.S. rate. This brings the rate of default for these considerable loans up to a skyrocketing level of 12 percent as of September, compared with 6.3 percent on loans less than $250,000 and 7.4 percent on all U.S. mortgages. This is quite a jump from the year prior where the rate for default on the $1 million dollar plus mortgages as only 4.7 percent.

So, take a look at HAMP. HAMP is offering distressed homeowners a second chance. A chance to keep a roof over their family’s head. A chance to keep the sense of pride instilled by owning your own home.

It’s not a cure-all. But it’s a place to start.

By Gino Blefari
President and CEO
Intero Real Estate Services

I‘ve heard the people in Sunnyvale, CA are generally happy….true?

Hey Gary!  Hey Robert!

I‘ve heard the people in Sunnyvale, Ca are generally happy….true?

You bet!  It’s another reason to look at Sunnyvale as a good place to live!

According to the Gallup-Healthways Well Being Index, which surveyed and ranked the happiness of people in 435 congressional districts across the country, Sunnyvale is at the top of the list!

Even in a recession, people here ranked high in physical and emotional health, work quality and access to services. There are good schools, great jobs and fantastic weather. Although the 14th congressional district, which includes Sunnyvale, Mountain View and Palo Alto, received the No. 1 ranking, the City of Sunnyvale was quick to claim the title. And, it has already been named the most well-run city in America.

Mission: Distressed Properties

By Gino Blefari
President & CEO
Intero Real Estate Services, Inc.

No one can deny the economic challenges we face as a country. They are the most challenging we have seen in generations. This environment demands more from brokers and Realtors than ever before; especially when dealing with those caught up in the epidemic of distressed and foreclosed properties.

Planning. Organization. Training. Execution. Leadership.

Let’s take a lesson from our own military, the Marines. Their reputation as hardened fighters is well documented. Their success stems from their organization and the precise training that enables the unit to understand and execute the mission of the unit leader. Their order consists of these five elements:

  • Situation
  • Mission
  • Execution
  • Administration
  • Command and Communication

Simple. Direct. Concise. Effective. And I believe this order can be implemented in real estate and guide us through and out of this current market situation. I’ll break it down as follows:

Situation – This is the background to your problem or the events leading up to where we are now. We have been facing incredible pressures and fluctuations in the housing market for over 24 months. Starting with the stricter lending requirements and plummeting home values during the sub-prime mortgage crisis that started in 2007. Two years into this foreclosure crisis we see unemployment, the traditional driver for foreclosures, come into play. While the focus has been primarily on Wall Street and the individual homeowner we recognize the tremendous pressures that have been placed on the individual agent and brokerages.

Mission – This is what we do about it. As I assess this new environment, it becomes painfully apparent that in order to respond to the needs of a distressed marketplace, we had to first and foremost ensure that our own company did not become distressed.

Secondly, we recognize that for our neighbors and prospective clients the immediate goal is saving their home. Granted, this appears counter-intuitive to our core mission of selling homes, but the underlying situation called for this. As Realtors, our mission is to get up to speed quickly, briefed on issues and expand our network of strategic business partners like never before. Therefore it became our mission to train our agents to do just that.

Execution – This describes how our mission is to be achieved. In a distressed market like the one we face today, the solutions we offer and the unique obstacles associated with delivering those solutions are changing rapidly. That is why we have created a department that specifically addressed the problems, opportunities and solutions in the distressed markets. We provide internal loss mitigation training through our Short Sales Division. We also encourage our agents to become Certified Default Resolution Specialists, to better connect and guide distressed homeowners through all of the options available to them. In addition, we are reaching out to servicers, local government agencies, non-profits and to the community to work collaboratively to address the issues and to help jumpstart neighborhood stabilization.

Administration –
This regards the resources required to accomplish your mission.  A brokerage’s most important resource is its agents and empowering them was the most important thing we could administer.  Everyone is working frantically to create new processes, new technologies, new laws to help homeowners, but they are all fruitless if there is not a trusted source to help the homeowners engage in the process. This is where our agents come into play. Servicers are overwhelmed by the number of defaults and homeowners not able to make contact with their servicer, thus never realizing they have options to avoid foreclosure, who better to address and administer to their problems than the Realtor.

Command and Communication – Who’s in charge? Who do you report to? How do you communicate with each other?

With all other forms of loss mitigation, making initial borrower contact is still the key. The fact remains that in a great number of foreclosures, estimates are between 50-60% of all REO properties, there was never any contact between the homeowner and the servicer. Obtaining accurate borrower and property data is challenging to say the least. There are many moving parts and players, which can easily lead to loss of communication.

At Intero, it is the individual agent that remains the most viable solution to engage the distressed market and affect the greatest change in the housing recovery in the years to come.

Semper Fi

The challenges we face are daunting. The road is neither short nor straightforward. It is littered with obstacles, both old and new. But it is the road we must travel in our chosen profession and the road we choose to improve for the well being of the communities we serve.

Take inspiration from my Dad, a decorated WWII Veteran awarded with two Purple Hearts, and the Bronze Star of valor (just to name a few,) quoted often, “Courage is not the absence of fear, it is forging ahead in spite of it.”

4 Reasons to Buy

Lately there has been a lot of discussion about the $729,750 loan limits being extended through 2010. And, many are excited that the tax credit for home buyers has been extended and expanded to include buyers who have owned their current homes for at least five years.

Even with those two incentives in place, there are some would-be-home-buyers that are still sitting on the fence. Here are two additional data points that may help move you into action:

  • Today the 10 year Treasury yield is at 3.2%. This indicator corresponds to mortgage rates – typically when it’s down, mortgage rates are down. Throughout this year rates have remained at historical lows; the average 10 Year Treasury yield for the last 12 months was 3.17%. However, the average yield over the last 10 years was 4.50%. In fact, from April 1953 to December 2008 the average annual yield for the 10 year Treasury was 6.36%. The highest rate during that 55 year period was 15.32%; the lowest rate was 2.29%. The high was attained in September of 1981. The low was achieved in April of 1954. Translation: Evidence shows the 10 year Treasury yield and conforming mortgage rates are at historic lows; it’s unlikely they’ll continue in this range throughout 2010. How often does a 55 year interest rate low occur? About every 55 years!
  • According to the National Association of Realtors®, last month showed another big gain in existing-home sales and inventories continue to decline. Translation: the competition is getting tougher.

Please contact us if we can answer any specific questions or if you’d like to discuss buying or selling strategies.

Critical Changes in Underwriting Loans Coming Soon

Next month the Federal National Mortgage Association (FNMA), commonly known as Fannie Mae, will be making some critical changes to their automated Desktop Underwriting system (DU). These changes may impact buyers who could be approved today but will have challenges being approved for financing once these changes take effect.

Here are some of the changes that will take place as of December 12, 2009:

  • Fannie Mae will no longer approve ratios exceeding 45%, unless the borrower has very strong assets and exceptional credit scores. They will not approve a debt to income ratio over 50%.
  • A minimum credit score of 620 will be required.
  • A minimum of 2 months reserves will be required on owner occupied purchases.
  • A minimum of 6 months reserves will be required on investment purchases.
  • Borrowers using stocks, bonds, or mutual funds as assets for reserves will be able to include up to 70% of their current value.
  • Retirement funds will only be counted at 60% of value.
  • Credit reports will have to be less than 90 days old on an existing home purchase. This will be important for anyone with an extended escrow, such as a lengthy short-sale purchase.

For Rent Scam!

Recently, a home we have listed for sale ALSO popped up as “for rent” on Craigslist; offered for rent by
someone neither the owners or ourselves have ever heard of!!

The scam is they give you a story about how they were recently transferred, and need to rent the home out
quickly and for below market rent to someone who will take good care of it for them.  Since they’re
already “gone”, you have to send them a rental application (and possibly mail them a deposit check) over
the internet.  If you send them a check, you’ll never see or hear from them again.  If you don’t mail a
check, they still benefit from having your name, address, social security number, date of birth, driver’s
license number, etc.  That information is on all standard rental applications.  Plenty of information for
identity theft, opening credit cards in your name, etc.

So, before renting ANY home, make sure you meet the owner AT THE HOME.  This will help eliminate the
chance of your getting scammed out of your money or your identity.

Conforming Loan Limits Remain the Same!

Conforming loan limits for high-cost areas of the United States will remain at $729,750 through the end of 2010
following action in the House and Senate this week to extend the ability of Fannie Mae, Freddie Mac and the
Federal Housing Administration to make and purchase those bigger loans.

The higher limits were set to expire Dec. 31. The extension removes some year-end uncertainty for mortgage
companies, which had already been preparing for lower limits. Without the new law, the high-cost loan limit
would have fallen back to $625,500.

“Given the lack of a private secondary mortgage market, FHA, Fannie Mae and Freddie Mac are pretty much the
only game in town,” said Robert Story Jr., chairman of the Mortgage Bankers Association. “Extending the
current loan limits through 2010 will allow more loans to qualify for these important programs and will
help keep mortgage credit more accessible and affordable for qualified borrowers.”

“As we try to maintain the momentum of the housing recovery, providing affordable financing for qualified
borrowers is critical. Extending the loan limits, along with other initiatives such as extending and
expanding the home-buyer tax credit, will help restore stability to the housing and mortgage markets,” he said.