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I agree with the buy-and-bail premise, that it’s not right to go buy a new house and then let your old house be foreclosed.  But the new Fannie/Freddie rules (and VA) makes it tough on those who would like to build a portfolio of real estate by keeping their old house for a rental. 

The three requirements:

• 30% equity in the residence you’re leaving
• 6 months’ worth of PITI payments of both houses in the bank at closing
• Must qualify to buy new one without using rental income on the old one

FHA is easier.

FHA requires that you have 25% equity in your old house, but they base your equity position on THE ORIGINAL PURCHASE PRICE, not today’s value.  While that doesn’t help those who have owned their old house for years, it’s a real break for people who bought at the peak.

FHA sticks with their regular guideline - NO RESERVES REQUIRED at all.

If you have trouble qualifying for both houses without the rental income on the old one, FHA allows for you to move into a third residence (in with parents, rent an apartment, etc.) for six months.  They’ll call the old house an investment property, and use the rental income towards qualifying.

DO NOT BUY-AND-BAIL!  But if you would like to legitimately keep your old home as a rental and can find a new home that’ll be in the FHA range, it can work.

If the government has a game plan, it would be to push more buyers towards FHA financing.  Beginning next year, the FHA will be collecting at least 1.75% on every loan (up from 1.50%).  It’s their self-insurance, and hopefully the extra bump in 2009 will be enough.  They also add a monthly MI (see below)

But they haven’t tightened up much – here are FHA benefits:

• No minimum credit scores required (a history of cell-phone-bill payments will work)
• Down payment to be 3.5% in 2009 (up from 3%).
• Buyer’s entire cash needed can be gifted from family, employer, etc. (but no more DAP)
• Sellers can pay up to 6% towards closing costs and repairs
• No reserves required
• No cap on debt ratios – compensating factors considered (55% is about as high as they go)
• No impact from declining-market conditions
• Loans are assumable
• Not limited to first-time homebuyers
• Sellers are no longer required to make most repairs (before they had to repair anything the appraiser found unacceptable)

The FHA loan amount has been $697,000, but it is expected to match Fannie/Freddie’s new San Diego amount, $546,250.  Here’s a sample qualification:

$565,000   sales price

$  19,775   down payment

$545,225   loan amount at 6%

$3,268.90  P & I

$   565.00  Prop. Tax

$     75.00  Fire Ins.

$   249.89  Mortgage Insurance

$4,158.75  Total Housing Cost

$    600.00  Car Payments (guess)

$4,758.75    Total debt (divide by 55%) = $103,824 annual gross income to qualify

You can keep adding non-occupying related people until you qualify.  As long as your parents aren’t maxed out on credit cards, they can co-sign and their income and expenses are added to the qualification, even though they won’t be living there. 

VA

It used to be that VA loans were 100% LTV up to $417,000, and 25% of everything higher than that.

But now VA is financing 100%, up to $729,000!

There is also plans to raise the max loan amount to $1,050,000 with no down payment.

Of the 33 houses on Monica Circle, ten have been foreclosed this year, or in foreclosure now. Investors have purchased six of the seven sold, and are active throughout the neighborhood (near the Camp Pendleton back gate in Oceanside, CA 92057). The first house in the video sold by Downey closed for $150,000, the next house (blue-gray) closed for $143,175, and the house next door to that one is still pending, listed for $167,900.

Here’s a 2:02 min youtube video tour:

Just when 3,000+ sales close in San Diego County last month……

The government’s injection of capital into Fannie Mae and Freddie Mac probably came with some caveats, like “You better do something to stem the defaults!”

From Freddie’s latest bulletin: http://www.freddiemac.com/singlefamily/20081017_advisory.html

• No more stated-income/stated-asset loans
• Debt-to-income ratio reduced to 45%  (currently 60%)
• Minimum 620 FICO for down payments of 25% and more
• Minimum 660 FICO for down payments less than 25%
• Maximum 90% LTV  (10% down payments, primarily due to MI companies backing off)

Plus a couple of other notes:

We will require that the Seller consider derogatory information significant if there is a short payoff related to a delinquent Mortgage obligation within the last seven years.      (We had been thinking that you’d be eligible for a new loan 4-5 years after a short-sale)

Buy-and-bail requirements: We will require that both the housing payment on the Borrower’s current residence and the amount of the payment on the subject mortgage be included in calculating the monthly debt payment-to-income ratio, and additional reserves will be required, based on the LTV ratio of the current residence as evidenced by a current appraisal. (Buyer must qualify without using rental income to offset the previous home’s payment, have 30% equity in old home, plus have 6 months PITI reserves on both homes)

Another difference that has evolved is that the agency loans between $417,000 and $546,250 will still be called ‘super-conforming’ loans, and come with a slightly higher cost, unlike I reported last week.  The difference yesterday was only an 1/8% to 1/4% extra fee to get the same conforming interest rate, but it’ll be interesting to see if that holds.

These can be seen as make-sense changes, and for those who don’t quite cut it, there is always FHA/VA.  A review of those coming next.

D Max posed these thoughts:

I don’t have a guess but I do have a few questions:

When is the last time in history when October sales were higher than June sales? The sales trend, as far back as I have been able to research, is fairly predictable. Do you have any theories what is causing this unusual sales pattern? Are the banks in SoCal starting to lend money again? Are foreigners purchasing these properties? Where are these buyers coming from and is this pool of buyers bottomless or is it drying up?

Let’s compare the sales history between June and October:

Normally there is drop-off in sales in the fourth quarter, and almost all of these October counts are substantially less than June (1997 was unusual). Add into this mix that the interest-only loans started being pushed in 2001, and the neg-ams really got going in 2003, and you’ll see that by 2003 we hit warp speed; even though prices were going up substantially, sales were still smoking.

Typically there had been some price drop in the fourth quarter too, but between 2000-2005 the prices kept going up, even though sales declined.

In 2008, with the price trend in a steep descent, the October sales has bucked the normal trend of fewer sales – normally a double-digit decline turned into a 14% increase!

To answer D Max’s questions, I think it’s purely a result of buyers finding some homes priced well enough that they are buying. The lending has gotten tighter, but I wouldn’t call it tight – yet. More to come on that later.

The purpose for running contests here is to shine the spotlight on specific market checkpoints.  Recent sales have been spectacular, given the economic environment.

No one is suggesting a ‘bottom’, there will be plenty of squishdown ahead.  But I’ve said in the past that if we can make it through a fourth quarter without a 10% drop in sales and price, it would be a good sign.

I think we’re still going to see the 10% price decline in 4Q08, compared to last year, but sales are much improved.  We had almost as many sales last month as we had in October AND November of 2007 combined, and, as of this morning, there have already been 944 closings this month!

The way that the 2008 market wraps up should give us a good read on momentum going into 2009 and the Obama era – let’s keep an eye on sales the rest of the year.

Today’s contest:

Guess the number of closed sales for November and December combined.

I’ll lay out some evidence below, but first the prize for closest guess:

A. Four tickets to a Padres game. (OK, OK, not much of a prize)

B. Six tickets to the Buick Invitational, Feb 3-8 (good for any day)

C. Invitations to the “Birthday Bowl” party - the Super Bowl is on my 50th birthday (2/1/09), so plans are in the works for a combo event (probably at my house, not Tampa). 

Consider the following positive evidence:

1. October’s sales total is usually one of the lowest of the year, in 2008 it was the highest:

2. Those with hefty down payments are buying.  A review of the first 21 Carlsbad closings in November showed that only two buyers used less than 20% down, and 13 of 21, or 62% used at least a 40% down payment.  Four paid all-cash.

3. The ‘Close-Enough’ syndrome – from today’s L.A. Times, and though it talks about Santa Ana, the same mindset is happening here.  Includes a quote from Chris Thornberg, “Getting to the bottom is different than getting off the bottom.”

http://www.latimes.com/news/local/orange/la-fi-santaana18-2008nov18,0,619872.story

4. There are lots of “bank deals” in the county, but there are areas where there are few or no houses for sale.  For example, the Centex neighborhood in La Costa Valley doesn’t have an active listing, and the Santander neighborhood in SW Carlsbad has had two listings all year (both sold).  Sonata, Santa Fe Trails, the Ranch, and Starboard in SE Carlsbad have all been relatively quiet lately too.

5. The “Obama Effect” could get buyers to “feel better” and improve consumer confidence.

The again, consider the negative evidence:

1. Unemployment could be the final nail in the coffin.

2. Government intervention does nothing but enrich Wall Street bankers.

3. The roughly 11,000 SD properties that have received default notices are joined by probably at least as many who are delinquent 1-6 months, but haven’t received a notice yet. With 22,000 or so bank-involved properties to digest in the coming months, sales could stall just purely based on processing overload.

4. The coming 90-day foreclosure freeze is going to further slow REO inventory, we could see a shrinking sales.  Today’s inventory is 16,862, and according to BMIT the November counts in the last two years were 22,239 (2007) and 19,831 (2006).  With fewer well-priced homes, will buyers keep buying, even if they have to pay a little more?  Maybe, but only for the superior homes, which there are very few for sale.

5.  The “Obama Effect” could have dire consequences if taxes are raised, and the economy tanks.

Here are the combined November/December sales the last few years:

2007 – 3,254

2006 – 4,726

2005 – 5,603

2004 – 6,464

2003 – 6,988

2002 – 6,202

2001 – 5,096

2000 – 5,661

1999 – 5,651

1998 – 5,242

1997 – 4,757

1996 – 3,831

There are currently 5,877 pendings, and 944 have already closed this month – how many more will close before year-end? 

Leave your guess of the total November and December closings in the comments section, and extra credit for justifying your number!

In the earlier part of 2008, the MLS sales and foreclosures were running neck and neck, and we thought by now that the REO count would surpass MLS sales.

But then the government got involved.

Between the state law mandating that lenders give homeowners an extra 30 days to consider counseling or a loan modification, and the feds concocting savior programs that have turned into idle threats, the processing of foreclosures has slowed considerably.

What is the back log? What can we look forward to over the next few months?

Here are the October MLS sales & REOs, plus the pending NODs and NOTs:

As the October numbers roll out, you’ll hear people claiming that the market has improved.

But with at least 10,743 properties waiting to complete their REO processing, we should see foreclosures get back on track over the next few months. That is, unless the loan mods work?