Melissa Savenko's Richmond Real Estate Review

Changes to FHA Financing - Mortgage Insurance Premiums Going UP April 18, 2011

Happy Valentine's Day to us!  On February 14, 2011 the Department of Housing and Urban Development promulgated formal guidance on an increase in mortgage insurance premium ("MIP") for FHA loans, effective April 18, 2011.  FHA is going to increase the MIP expense by 25 basis points, or one quarter of a percentage point (0.25%).  What does that mean for FHA borrowers?  FHA loans, which already have a fairly hefty upfront fee PLUS charge MIP for five years, are going to be more expensive.

In plain English, how does that effect YOU as a potential FHA borrower?  For every $100,000 you borrow, you will pay an additional $22.50 per month, because of the MIP increase.  That's an additional $270/year.  Or an additional $1,350 over the life of the loan.  Now, some people may say, "no big deal."  But for first time buyers, who often judge what they can buy based on a monthly PAYMENT, that extra $22.50/month per $100,000 borrowed ain't chump change.  On a $200,000 loan, that $45/month could go to pay a utility bill.

This is just one of the changes to federal lending rules that will make it harder for moderate income buyers to borrow.  The seller closing cost contribution is expected to come down to 3% from 6%.  That means more cash out of pocket for buyers.  The underwriting standards will be tightening.  Credit score requirements will be increasing.

But it's not just moderate income borrowers who will be impacted.  Fannie and Freddie are going to require more money down for their loan products, possibly as much as 10%.  Conforming loan limits are going to come down, likely back to the traditional $417,000, meaning loans larger than $417,000 will be non-conforming and therefore more expensive.  Trust me, there is plenty of pain to go around if all of the recommended changes are implemented.

More on all of these changes in the next several weeks.  But the practical reality is if you are considering buying a home, and particularly if you are going to be an FHA buyer, consider buying NOW to avoid those April 18, 2011 changes.  Interest rates are great and there is more and more inventory coming on for the Spring market, so there are wonderful opportunities out there.  Otherwise, more marginal buyers may find themselves able to borrow much less, or shut out of the market altogether.

Thanks to Ingrid Sell for originally posting this document on Facebook.

ALL The Articles To Date in the Justin French Scandal - Necessary Background Before My Defense of Historic Tax Credits

Wow.  I can't even keep up with all the articles on the Justin French mess.  For those of you who have not been following the sordid drama, here is the list of articles from Richmond BizSense (who broke the story), the Richmond Times-Dispatch and Style Weekly.  They are in chronological order, as the story unfolded:

• Richmond BizSense, "Strategic Default?" June 30, 2010
• Richmond BizSense, "French's Bills Pile Up," July 9, 2010
• Richmond BizSense, "In Development Feud, Writing Is on the Wall," July 16, 2010
• Richmond BizSense, "Union First Sues Justin French," July 19, 2010
• Richmond Times-Dispatch,"Developer Fights Bank in Takeover of Property," July 20, 2010
• Richmond Times-Dispatch, "Judge to Decide in Bank's Bid For Properties," July 27, 2010
• Richmond Times-Dispatch, "Judge Approves Receiver for Certain Justin French Properties," July 28, 2010
• Richmond BizSense, "French Saga Takes a New Twist," July 29, 2010
• Richmond Times-Dispatch, "Developer Loses Control of 8 Properties," July 29, 2010
• Richmond Times-Dispatch, "Richmond Developer at Center of Dispute," August 1, 2010
• Richmond Times-Dispatch,"Federal Agents Raid Developer's Office," August 5,2010
• Richmond BizSense, "Feds Raid French's Office, Developer Goes Off the Radar," August 6, 2010
• Richmond Times-Dispatch, "Federal Agents Raid French Consulting Office," August 6, 2010
• Richmond BizSense, "I Was Not Told Why They Went In," August 6, 2010
• Richmond Times-Dispatch, "Architect on Two of Developer's Projects Sued," August 7, 2010
• Richmond BizSense, "Architect on French Projects Sued," August 10, 2010 
• Style Weekly, "Justin French, Chapter One," August 10, 2010
• Richmond BizSense, "French Tax Credit Records Raise Red Flags," August 12, 2010

This is going to be a critical story in Richmond for a while to come, and the fallout goes well beyond Mr. French.  I am already hearing stories from commercial brokers of deals falling apart because of the local banks' exposure on the French projects.  I'm hearing that lenders are refusing to touch any transaction with a historic tax credit component.  I'm hearing that commercial lending by the community banks in this town has ground to a screeching halt while this mess is sorted through and the banks' losses quantified.

This is very, very, VERY bad news for the City of Richmond, which has the largest number of historic properties and neighborhoods in the Greater Richmond Metropolitan area.  Historic tax credits are a means to revitalize these neighborhoods, increase property values, and promote environmentally-friendly building practices.  Yes, they can be abused by unscrupulous actors, but don't let a few bad apples spoil the bunch.  Folks, historic tax credits are a very good thing.  In my next posts, I want to explain exactly why.  But until you understand how tax credits work, please don't condemn the entire program just for the bad actions of one developer and his cronies. 

Banks and Foreclosures - They Don't Want the Property! - Then Stop Acting Like IDIOTS!

According to this article in Richmond BizSense, local banks and other financial institutions don't want the properties they're taking back by foreclosure, so they are creating their own websites to try to sell these properties.

Well, excuse me if I have little to no sympathy for these lenders.  I have seen WAY too many insipid, asinine, and down right idiotic decisions by these folks to buy their "woe is me!" tale.

Just a few illustrative examples:

• Individual with legitimate hardship (reduced pay, unexpected illness leading to additional expenses) but a good job files loan modification paperwork with large regional bank on December 12, 2009. Individual is NOT asking for principal reduction, only for reduced monthly payment in the form of an interest rate reduction or perhaps a short-term forbearance.  As of today, individual STILL has no answer, despite almost daily calls to the bank.  Lender is now threatening to foreclose due to one missed payment.
• Father loses his job and is unable to make mortgage payments.  The family has equity in the home.  They put the house on  the market at a fire sale price, while racing against the clock, since the bank has started foreclosure proceedings.  Ten days before the scheduled sale, they receive an offer on the house that would pay off the note in full AND give them $50,000 nest egg to find a rental and get back on their feet.  The lender refuses to cancel the foreclosure sale because it is "too late" for them to review the offer.  The bank forecloses.

And these are just two of MANY examples we have, just here in my 15 agent office.  So excuse me if I have no sympathy for these guys.  If they had procedures that made any d*mn sense and individuals who had any authority and could make REASONABLE DECISIONS then perhaps I would.  But over and over again I see banks scr*wing over good folks who have fallen on hard times and are trying to do the right thing.  So wah, wah, wah guys - you are reaping what you sow.  And ruining lives in the process.

More on the Justin French Debacle - Strategic Defaults and Sophmoric Responses

OK, weird.  I wrote this on July 19, and thought I'd posted it.  Clearly not.  So, this post is a bit stale, but I'm putting it up anyway.  I'm just getting back from vacation and I'm trying to catch back up with everything, including this story.  I suspect it may take a few days.

********

Here's yet another article about the Justin French/Markel story, originating with Mr. French's strategic defaults on various commercial properties in various locations throughout the City of Richmond.  There have been several BizSense articles, so check out their website.  Note the comments, which are, IMHO, the best part of the articles.

I'm fascinated because Scott's Addition is my neck of the woods, and I've got experience with historic tax credit renovations.  I work with a number of investors who use historic tax credits for renovation projects, although most do not do whole-cloth warehouse conversions/multifamily adaptive reuse projects of this size and scale.  I myself have used tax credits on two "flips," including my current personal residence. 

My two cents on this most recent article, for what it's worth:  Being the daughter of a contractor, my strongest sympathies lie with any tradesman or contractor who has worked on a project and not gotten paid.  In this economy, these guys are surviving job to job, going out of pocket on materials, working in good faith, and to be caught in the cross-fire here...well, I think it's shameful.

Here's hoping the little guys get paid.  SOON.

Strategic Defaults in the Residential Real Estate World - The Word from Ken Harney

Interestingly, after I posted a local story on strategic defaults in the Richmond commercial development world, I came across this article by Kenneth Harney, a  national real state columnist, on the impact of residential defaults.  Seems the lending and credit scoring world is analyzing strategic defaults in  the residential market.   A "strategic default" occurs when a homeowner intentionally walks away from a mortgage, usually when he or she owes substantially more than the current market value of the property.  In other words, the homeowner CHOOSES to stop making payments, knowing the lender will ultimately foreclose.  The article suggests this phenomenon is more likely in states that limit the ability of lenders to go after the mortgage holders for any deficiency, i.e, the difference between the foreclosure sale price and the original mortgage.  Harney also suggests the strategic default issue is likely to create stricter underwriting requirements for anyone trying to borrow, even folks previously considered "platinum" because of their credit scores.

Personally, I have not yet come across anyone who is making a conscious choice to default on their mortgage. Maybe I'm lucky. Maybe this is a function - as I believe - of the fact that the Richmond area is much better off than other, harder hit markets, like Florida, Arizona, California and Nevada.

I don't know that there is a "moral" to this story.  Maybe the takeaway is things could continue to get worse, before they get better.  I sure hope that's not the case.

Magnolia Green Community Back on Track with Local Development Company as Project Manager

Interesting.  According to the Richmond Times-Dispatch, Magnolia Green, a GINORMOUS planned community in Chesterfield County, is back in active development with Atack Development as "the local contact in charge of construction, marketing, homeowner communications and the liaison with the county."  When I say ginormous, I mean Woodlake size - 3,500+ homes are planned, with retail and commercial development as well. 

What makes this story interesting is the fact that Magnolia Green is owned by THE LENDER that foreclosed on the property last year.  So now it appears that iStar Financial Inc. is in the business of owning and even developing real estate.  Usually lenders don't like to own property, much less actively develop it. 

We'll see how this goes.  Will we see more lenders taking property back and then trying to develop it themselves?  Maybe this is the lending industry's version of "too big to fail."  Only time will tell.

Hey Doctors and Lawyers - 100% Financing Still Available!

Whoo-eee!  I haven't written in a while because it has been INSANELY busy.  Like crazy, "what day is it?" five-hours-of-sleep-a-night busy.  I am not complaining, trust me.  But this pace makes me feel like I'm back in the corporate law firm gig.

But enough aboout me.  I wanted to post a quick note to remind doctors - including new residents - that there are still 100% financing products available for doctors, pharmacists, and new lawyers.  in fact we call them, ever so creatively, "doctor loans."  Of course there are caveats, but this is not a joke or a "too good to true" deal.  Not many lending organizations do these deals any more, but there are still a few local and regional outfits who can and will.

So, if you are a new resident, or a doctor coming out of a residency, or a Pharm. D., or a baby lawyer going to work for a big corporate law firm, give me a call and I can hook you up with some lenders who might be able to help you buy a house with next to zero dollars down.  Yes, you can qualify even with medical or law school debt.  It might sound too good to be true, but it isn't.  Really.

But if you are looking to qualify for 100% financing AND the first time buyer tax credit, you need to get on the stick NOW.  Only 28 days left, people, before that gift from the government goes away. 

Tick Tock, Tick Tock - First Time Homebuyers Need to Be Writing Contracts NOW

Folks, there is tons of real estate-related news in the paper these days, lots of it having to do with foreclosure prevention programs, new principal forgiveness programs, the state of the real estate markets, how the Federal Reserve is going to manage the economy once it stops buying mortgage-backed securities at the end of this month, etc.  BUT....

For the next 35 days I am going to be pretty much "All First Time Home buyers, ALL THE TIME!"  The $8,000 first time buyer tax credit expires on April 30, 2010.  The "new" $6,500 replacement home buyer tax credit expires the same day. 

Now replacement home buyers, having by definition been through the home buying process before, understand that it takes several days, often several weeks, of negotiation to get a property under contract.  That is particularly true in the current environment when the buyers are asking for all kinds of concessions, like closing costs, or appliances, or home warranties, or your first-born child....you get the idea.  So the replacement home buyers seem to have their act together on timing.  They are looking hard now, and ready to write a contract in the next week to 10 days.  [NOTE:  These buyers also for the most part seem to be fairly unmotivated by the relocation tax credit. That makes sense to me, but is a topic for another day.]

Some first time home buyers, having not been through the home buying process before, don't understand that they need to be pre-approved from an acceptable lender before any seller with any sense will even consider an offer.  Then, negotiating a contract takes days, if not weeks - unless you are writing an all cash, no contingencies offer, and I'm not seeing those from anyone but investors buying foreclosures or short sales.  Then, once the contract gets negotiated, it has to get through to closing, which means through financing, inspection, appraisal and termite, all contingencies which could derail a deal between contract and closing. 

We real estate agents are getting increasingly agitated, since we are intimately familiar with the time line and potential pitfalls in a house sale, especially in this very trying environment.  So we're telling our first time buyers to "buy, buy, BUY - NOW!", and some of those buyers are suspicious of our motivations.  [NOTE: Why are these buyers suspicious of our motivations?  That's also another topic for another day.  My very short answer:  It seems the first time buyers are disproportionately likely to be using a real estate agent they found on the Internet or picked up at an Open House.  Which I do not understand AT. ALL.]

So, if you are a potential first time home buyer, and if you haven't gotten started, or you are JUST getting started, and if that $8,000 is a big deal to you, then get on the stick QUICK.  And find a real estate agent to help you, if you don't have one.  But for goodness sakes, interview a few different candidates before you make a decision.  If you would definitely interview several agents to sell your house, why wouldn't you interview agents to sell YOU a house?

By Invitation Only - Bank of America Announces a New Loan Forgiveness Program Announced

Bank of America has announced that it will be forgiving some principal amounts to keep some struggling home owners in their homes.  The program is not open to everyone - it will be extended to certain bank customers.  But for those individuals and families that get the invitation, what it means is BoA essentially waves its magic wand and...POOF!  Some portion of your mortgage debt just disappears forever.  BoA could choose to reduce a $200,000 note to $150,000 - $50,000 in debt forgiveness just like that.

BUT....as with anything, the devil is in the details.  And I'm not sure how reducing someone's principal balance matters if someone in the household has lost a job or had a serious pay reduction, which is now what's driving the record number of foreclosures, IMHO.  Yes, your monthly payments would be lower, but if a household went from making $100,000 in income a year to $50,000, knocking a few hundred dollars off a monthly mortgage payment doesn't matter.

What I don't understand is why the banks don't have loan FORBEARANCE programs, like some other forms of lending do.  For example, you can request a forbearance on certain federally insured student loans.  I did it last year for my law school loans.  The process is simple and painless - talk to someone on the phone, submit a few forms explaining the circumstances that justify the forbearance (hello, 40% reduction in income!), and presto, chango!  You get anywhere from 6 months to a year of forbearance, to not pay the loans.  Now, the loan balance is still accruing interest, and that all gets tacked on to the principal amount due, but you, the borrower, get a bit of breathing room if your income situation is expected to be temporary.

Why can't banks and other lenders do the same thing with mortgages, in appropriate cases? 

Historic Rehabilitation Tax Credits as a Community Revitalization Tool

I love historic properties, and it makes me happy to see wonderful pieces of historic architecture being adapted to modern uses.  In my career, I am lucky to work with various developers and individuals who quite often use historic rehabilitation tax credits.  I myself have used tax credits in two residential renovations.  Tax credits are a GREAT tool for making certain development that meets certain objective criteria workable and economic.  This editorial from yesterday's Richmond Times-Dispatch, "Tax Credits Can Revitalize a Community," explains tax credits in more detail.

These are state and federal programs that actually WORK.  These are programs that pay for themselves.  Virginia should be proud for being one of the most progressive states in this arena.  Pat yourselves on the back, people.