Risk-averse lenders seek solid-gold buyers

By Roger Cruzen

William Shakespeare may not have been thinking about real estate when he penned the famous phrase "Neither aborrower nor a lender be," but his words come pretty close to describing the mortgage lending environment California real estate agents and home buyers face in 2008.

One hundred percent or interest-only loans? History. Subprime borrowers? Out of luck. Despite the best buyer's market in years, borrowers are having difficulty borrowing and anxious lenders have become risk-averse in the wake of a mortgage credit meltdown that may prolong the market downturn.

"I've been in the business 22 years and I've never seen the secondary market evaporate and whole loan types disappear," says Pete Ogilvie, a mortgage broker with First Residential Mortgage in Santa Cruz and 2007 president of the California Mortgage Bankers Association. Loan volume has declined so significantly that Ogilvie shuttered his Los Banos-area satellite office last August, joining a parade of other lenders who have closed branches.

Although 2008 buyers will face qualification standards even Shakespeare could endorse, the reality is that hard-working agents will continue to close transactions using alternative funding sources and tactics that recall lessons learned during California’s last downturn.

Back to Square One–620 fico scores

"Today, the process starts by pre-qualifying [a buyer] with a reputable mortgage broker or lender–someone you know who has experience beyond a hot market," advises Ogilvie. "Talk to people who have been in the business 10 years or more and find out how they used to do things, because that's what we're back to."

Banks today are looking for no-risk buyers. "We’ve slowed from 180 miles per hour to 10 miles an hour, and now we’re back where we were pre-2000," states Beth Cheatwood of Medallion Mortgage in Bakersfield, where borrowers who, a year ago, would have been candidates for a subprime mortgage are beginning to return to that old standby, FHA. The reason is FHA is considered more lenient because it bases qualification on a borrower's credit history and not on a FICO score.

Cheatwood cites a recently rejected couple with a 5 percent downpayment. "Her credit was damaged by a divorce, and to qualify they would have to pay a minimum of 20 percent down. A year ago, it wouldn't have been that big an issue." She advised the couple to stop looking until their credit is clean. "There's no use wasting their time or anyone else’s right now," she states.

A FICO score of 620 is the minimum needed to qualify for a conventional mortgage but even that doesn't necessarily make qualifying a certainty, says Cheatwood. One recent buyer who was self-employed and had a credit score of 799 just squeaked by because he could put $100,000 down on a $400,000 purchase. "It's all about risk. Banks want to see buyers have a pretty good sized stake in a home. This would have been a different story if he had only 10 percent to put down," she says.

Look for the(Credit) Union Label

San Jose-based Technology Credit Union, which operates in the nine-county Bay Area, isn’t suffering a credit squeeze because it avoided subprime borrowers, stuck with standard lending criteria, and retained its own portfolio of loans, according to AVP of Mortgage Origination Steve Donahue.

"At the time, it felt like we were leaving a lot of money on the table, but now we're receiving all the dividends from having done that," Donahue says. In 2007, the company closed about $135 million in loans. Many loans were to buyers whose financing had fallen through.

"We introduced a 10-day guaranteed close and picked up a lot of loans that fell out from mortgage brokers," explains Donahue. "As loans fall off the truck, we are starting to impress REALTORS® that we don’t have to go to Wisconsin or somewhere out of state for underwriting."

Technology Credit favors borrowers who have a minimum FICO score of 680. Even so, Donahue says credit unions can be more flexible because they know the local market. "Here in the Bay Area, for example, we have a lot of high-tech employees who may not have the highest income but are compensated with stock options and may have $50,000 to $100,000 in unexercised options that we can take into consideration," he says. "That gives us some flexibility that other lenders don't have."

Private Mortgages–Virgin Money

Even Shakespeare might alter his advice about borrowing money based onthe experience of Kevin Kieffer, GRI, of Keller Williams Realty in Danville.

Kieffer has twice used Virgin Money (formerly Circle Lending) to facilitate privately funded mortgages. These loans are typically between family, friends, or sellers and may become more popular if traditional options remain difficult to access.

Virgin Money helps parties arrange, close, and execute the provisions of a mortgage or personal loan the same way a bank would. It authors the note and manages closing paperwork, sets up payment schedules, and tracks payments just like a traditional mortgage servicer. The key difference is that it does so according to the custom specifications of the borrower and "lender."

In Kieffer's own case, working with Virgin Money allowed him to get out of an onerous mortgage on a property he couldn’t sell, set up a five-year loan at a lower rate and interest-only payments he makes every six months, and provide a friend with a higher interest rate than he could earn on a CD. "Now, I pay $2,600 every six months, instead of $1,200 a month to the bank," says Kieffer.

He now pitches the idea to clients. "I'd always been told that you don’t borrow from friends," says Kieffer. "But with this you get the security of knowing that everybody is covered even in the worst-case scenario. A lot of people don’t know it’s even available."

Banking on Short Sales

Agents also can help buyers buy and sellers sell by negotiating a "short sale" transaction, where the bank agrees to sell for less than the amount owed.

Short sales helped rocket Orange County entrepreneur Ron Garber to the top of RE/MAX's national sales charts during the 1989-2000 market decline. Today, Garber heads up Short Sale Plan, a one-stop facilitation service that helps banks dispose of an asset without taking ownership and generates transactions for agents in foreclosure-heavy markets.

Garber estimates that only 30 percent of short sales successfully closed in 2007, in part because banks weren't prepared to handle the onslaught of foreclosures and most real estate agents had never done one. Short Sale Plan educates agents in short sale logistics and simplifies short sale transactions by introducing process efficiencies. "We're taking what we learned about short sales during the last down market and offering brokers, agents, and banks a systematic approach to negotiating and completing short sale transactions," Garber says.

The key to success, Garber says, is in the precise execution of a 40-step process and knowing how to get your buyer’s offer to the top of the bank's growing pile of foreclosure files. "If you're an agent with a buyer who wants to make a short sale offer, you need to make sure you have all the documentation in place and can substantiate your offer," says Garber. "Buyers are gold in this market and you can end up losing that valuable buyer if you don’t have the expertise toget the job done."

Terry Baldwin, a ZipRealty agent from Concord, has earned a few bruises learning how to complete short sales since his first one two years ago. That's because banks haven't been set up to handle foreclosures, never mind short sale offers. "Some banks are promising answers [to offers] in 60 days," Baldwin marvels. "That puts the sellers in a horrible position, and a lot of offers fall through because the seller doesn't want to wait that longfor an answer."

It's more than some buyers and agents can stomach. Baldwin tells of a $500,000 property reduced to $475,000 after 40 days and to $445,000 after 30 more days. Finally, the seller received two offers—one at $445,000 and another slightly below—and presented the higher one to the bank. The offer looked like a go until a bank appraisal set the value back at $470,000—even though the property hadn’t sold weeks before at that price. The bank eventually counteredat $453,000.

Meantime, the market continued to slow. "What was a good offer before, probably is no longer a good offer," Baldwin laments. "I warn buyers that they have to be patient. I know one person who went through three or four shortsale offers before one finally funded."

Garber says agents who learn the ropes as banks are ramping up may be able to build a solid business around short sales. "There's a window of opportunity for people to get in there and get educated, do this kind of business, and do it very well," says Garber.

Resources

CalVet
https://calvethomeloans.cdva.ca.gov/welcome.html

Credit Unions
California Credit Union League: www.ccul.org/
Tech Credit Union: www.techcu.org/

Short Sales

Short Sales
"Short Sales Basics: What you need to know to serve ths market"

Private Mortgages
Virgin Money: www.virginmoneyus.com

No Frills CalHFA Fills a Void

Worried the mortgagelending squeeze is leaving your first-time homebuyer clients in the lurch? Working with a CalHFA-certified lender may be the ticket to a closed transaction if your buyer hasn't owned a home in the last three years, is a U.S. citizen or qualified alien, is willing to live in the home for the term of the loan or until the home is sold or refinanced, has an income that falls within certain limits by family size and county, and meets certain credit requirements.

While 100-percent products have all but vanished from the shelves at retail banks, CalHFA partner lenders continue to offer 100-percent financing on 30- and 40-year fixed mortgages at below-market interest rates. A fixed 35-year, interest-only for the first five years loan also is available, asis a 30-year fixed-rate mortgage that’s insured or guaranteed by the FHA, VA, or USDA.

CalHFA also offers downpayment/closing cost assistance programs in conjunction with local government agencies and housing authorities through its Affordable Housing Partnership Program (AHPP). The CalHFA Housing Assistance Program (CHAP) and California Homebuyer’s Downpayment Assistance Program (CHDAP) offer deferred payment junior loans of up to 3 percent of the purchase price or appraised value.

CalHFA alsohas special loans for teachers, administrators, and school staff that provide below-market rates and a forgivable interest through a CalHFA junior loan. And its High Cost Area Home Purchase Assistance Program (HiCAP) continues to be a valuable tool for first-time buyers in higher-cost markets.

For more information on CalHFA programs, visit www.calhfa.ca.gov/homebuyer/information

CalVet Loans Called Back to Duty

Identifying new and sometimes unconventional sources of mortgage money is a great way to increase closings in today’s tight mortgage market. But so is helping qualified clients take advantage of the tried-and-true home lending programs available to more than 2.2 million active duty and retired military veterans who call California home.

Each year, some 1,200 California home buyers purchase a home financed by the California Department of Veterans Affairs through its CalVet program. That's 1,200 transactions looking for a realestate agent to guide the purchase process.

And it's why it pays to become acquainted with CalVet loan programs and requirements, according to CalVet Chief Debra Lehr, who for 34 years has helped veterans obtain mortgage financing through the program.

CalVet programs are open to all active service, National Guard and Active Guard/Reserve, and honorably discharged veterans who have served a minimum of 90 days of active duty–including those who served during peacetime and who entered the militaryoutside California or have not previously lived here. What's more, most CalVet low-down, reduced-interest rate programs aren't limited to first-time buyers. "In fact, a lot of our veterans are repeat buyers who are coming to us for their third or fourth CalVet loan," says Lehr.

There Are Three Basic CalVet Programs:

CalVet/VA: This no-down payment program requires a Certificate of Eligibility from the U.S. Veterans Administration and covers new and existing homes, VA-approved condos, planned unit developments (PUDs), and mobile homes on land. A 1.25 percent to 3.30 percent funding fee (waived for certain disabled veterans) may be financed, and there’s a 1 percent origination fee.

CalVet 97: Requires 3 percent down,a 0.63 percent to 1.38 percent funding fee that must be paid in escrow, and a 1 percent origination fee. Eligible properties include new or existing homes, condos, PUDs, construction loans, rehabilitation loans, mobile homes on land, and mobile homes in parks (subject to restrictions).

CalVet 80/20: Requires 20 percent down and a 1 percent loan origination fee, but carries no funding fee. Applies to new or existing homes, condos, PUDs, construction loans, rehabilitation loans, and mobile homes on land.

Most purchases carry a $521,250 maximum loan amount, though second mortgages are available for homes that exceed the maximum. The limit for farm loans is $625,500. The limit for manufactured homes in mobile home parks was raised from $150,000 to $175,000, effective Jan. 1, 2008.

Interest rates for CalVet programs range from 5.45 percent for current National Guard/Reserve veterans who are first-time buyers and meet income limits and other federal limits, 5.50 percent for veterans with wartime service who servedprior to Jan. 1, 1977, and apply within 30 years of release from active duty, and 6.55 percent for so-called "unrestricted" loans, which include those made on homes situated in mobile home parks.

CalVet loans have other attractive features. All CalVet properties are covered under a disaster indemnity insurance program that insures against possible floods and earthquakes, and coverage on properties other than condos and mobile homes extends to loss from fire and other hazards. All loans are for 30-year terms, and there’s no prepayment penalty.

The only "catch" is that borrowers still must qualify. "Buyers need to be able to show a stable income," says Lehr. Lehr encourages REALTORS® to enroll in a special course on the CalVet program available for DRE credit.
 
Roger Cruzen is a freelance writer and public relations consultant based in Minneapolis, Minn.