One of the most ridiculous features of the housing bubble rally was when buyers would write emotional letters to sellers to try to make their offers stand out in the crowd. In 2004 in particular as the Option ARM permitted buyers to raise their bids to ridiculous levels, competing bids well over asking price prompted sappy letters to appeal to a seller’s emotions to get the deal. Now, with the federal reserve lowering interest rates below 3.5%, we face a similar infusion of affordability allowing buyers to raise their bids. The tight supply engineered by the banking cartel is causing the buyers to bid over ask again as they compete for the few properties available. The return of the ass-kissing letter is another sign of the success the cartel is having in reflating the housing bubble.
Can I Buy Your House, Pretty Please?
By JOANN S. LUBLIN — January 10, 2013
Rob and Julia Israch won a fierce bidding war for a three-bedroom townhouse in Mountain View, Calif., late last year even though their $750,000 offer—while $92,000 above the asking price—was topped by 11 rivals and was several thousand dollars below the highest bid.
A key reason: The seller, software engineer Lev Stesin, was moved by a letter in which the Israchs said they worked in the technology industry and explained how the home’s spacious layout would be perfect given the imminent arrival of their first child. Among other things, the townhouse has three bathrooms, a wood-burning fireplace and a roomy backyard.
“I felt very comfortable with these people,” said Mr. Stesin, himself the father of a toddler. “I really wanted this place to go to somebody in a similar situation.”
So this guy sacrificed his own families well being by leaving thousands of dollars on the table to give the house to a family he didn’t know. Brilliant!
In an echo of the last housing boom, ardent pitch letters from eager home buyers are popping up again in hot U.S. real-estate markets like Silicon Valley, Seattle, San Diego, suburban Chicago and Washington, D.C., housing economists and real-estate brokers say.
The heartfelt missives, often accompanied by personal photos, aim to create an emotional bond that can give their writers an edge—especially in situations where multiple bidders are vying for the same house. And the reappearance of buyer pitches, also known as love letters, offers further evidence that the housing market is rebounding after a five-year slump. …
It offers further evidence that the banking cartel’s policy of avoiding foreclosure through long-term squatting is reflating the housing bubble.
“It’s really a seller’s market,” said Mrs. Israch, a Facebook account manager. “This market is ridiculous.” She and her husband, a senior manager at NetSuite, submitted their first pitch letter while bidding for a different Mountain View townhouse last fall. They lost that one, outbid by seven of the 11 other would-be buyers.
Maybe their pitch would have been more successful if accompanied by a higher bid…
A pitch letter worked during Sandy S. Kuo and Syed Ahmad’s third attempt to buy a home in nearby Saratoga, Calif. The Microsoft and International Business Machines managers began house hunting in earnest after their July wedding. They had written letters unsuccessfully before. This time, they went into more detail about why they felt at home in a three-bedroom ranch listed for about $1.05 million.
“We imagined how we could set up the patio for BBQs, we discussed where our future baby’s nursery could be,” their two-page letter explained.
Someone should come up with a service to write carefully worded pitch letters loaded with emotional appeal. If a little bullshit can talk a seller down several thousand dollars, it’s worth the price.
Gary Barnett, who was selling the house on behalf of his late mother, said the letter “was very nicely done.” But with a $1.13 million bid, he said, “they also had the best offer.” The sale closed Nov. 15.
Extra effort involving a pitch letter paid off for Jonathan Duryee, a civilian management trainee for the U.S. Navy. He initially failed to snag a four-bedroom home in San Diego last October despite sending the seller a letter with four pictures of himself, his wife Nancy and their 10-month-old son. After the original buyer withdrew, he emailed the seller a new photo of his baby and two dogs around a handwritten sign that read: “We would love a big yard!”
“It really made me try to put these kids into the house,” said Scott Pursell, a veteran builder who was selling the home, which he acquired as a rental property 20 years ago. He even rejected an all-cash offer $25,000 below the Duryees’ $550,000 bid for the $549,900 dwelling.
He tried real hard I see. He accepted their offer that was $25,000 over the next highest competing bid. What a humanitarian. 
Pitch letters prove particularly effective when they create a personal connection with longtime occupants. Last fall, Judy Blankenburg and her sister decided to sell their three-bedroom childhood residence in Los Altos, another Silicon Valley community. Their mother, who died in July, had called it home for 68 years.
“My sister and I had a huge emotional attachment to that house,” said Ms. Blankenburg, a retired chemical analyst. “We didn’t want it torn down.”
The sisters accepted a bid that came in about $200,000 above their $1.8 million asking price from a Los Altos couple keen to raise their three daughters on a quieter street.
“From the majestic trees and the lush foliage in the front and backyards to the living room with high ceiling made of knotty pine, your home is filled with charm,” the Sastry family said in their letter. They moved in Dec. 15.
Ms. Blankenburg said her parents, avid gardeners, would have been pleased by the buyers’ fondness for trees. But she realizes the letter isn’t a commitment.
“Three months from now, I may drive by and find they tore [the house] down,” she said.
LOL! 
The buyers lied!
ROFLMAO!
I wonder how she feels now knowing everything in their emotional letter about how much they loved the house was complete bullshit?
Kantha Sastry said she and her husband don’t know whether they might one day tear down the 1938 home. But some Silicon Valley brokers have seen that scenario play out before.
A few years ago, the owners of an older Los Altos home got more than 21 offers and picked the one from a woman who also submitted a love letter from her dog, said Kathy Bridgman, an Alain Pinel Realtors agent who represented the sellers.
“She won’t touch a thing,” promised the letter, signed with a paw print. “I will be able to play in the yard.”
After closing, the buyer immediately tore down the home and built a bigger one.
My schadenfreude is hard to contain. Anyone who accepts a lower offer due to a sappy letter full of bullshit gets what they deserve.
The former owner of today’s featured property bought it with nothing down in 2002. Five loans later, she owed $417,000 on the property. Fannie Mae foreclosed on her in December and quickly put the property on the market.
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Proprietary OC Housing News home purchase analysis
28 CANYON ISLAND Dr #28 Newport Beach, CA 92660
$649,900 …….. Asking Price
$315,000 ………. Purchase Price
2/1/2002 ………. Purchase Date
$334,900 ………. Gross Gain (Loss)
($51,992) ………… Commissions and Costs at 8%
============================================
$282,908 ………. Net Gain (Loss)
============================================
106.3% ………. Gross Percent Change
89.8% ………. Net Percent Change
6.6% ………… Annual Appreciation
Cost of Home Ownership
——————————————————————————
$649,900 …….. Asking Price
$129,980 ………… 20% Down Conventional
3.51% …………. Mortgage Interest Rate
30 ……………… Number of Years
$519,920 …….. Mortgage
$141,573 ………. Income Requirement
$2,338 ………… Monthly Mortgage Payment
$563 ………… Property Tax at 1.04%
$0 ………… Mello Roos & Special Taxes
$162 ………… Homeowners Insurance at 0.3%
$0 ………… Private Mortgage Insurance
$594 ………… Homeowners Association Fees
============================================
$3,657 ………. Monthly Cash Outlays
($521) ………. Tax Savings
($817) ………. Equity Hidden in Payment
$145 ………….. Lost Income to Down Payment
$101 ………….. Maintenance and Replacement Reserves
============================================
$2,566 ………. Monthly Cost of Ownership
Cash Acquisition Demands
——————————————————————————
$7,999 ………… Furnishing and Move In at 1% + $1,500
$7,999 ………… Closing Costs at 1% + $1,500
$5,199 ………… Interest Points
$129,980 ………… Down Payment
============================================
$151,177 ………. Total Cash Costs
$39,300 ………. Emergency Cash Reserves
============================================
$190,477 ………. Total Savings Needed
The property above is available for sale on the MLS.
Contact us for a comparative market analysis, a cost of ownership analysis, or information on how you can make an offer today!
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27 Responses to “Sappy letters to sellers return in tight supply market”
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No surprise here. Sheeple have been conditioned to love their serfdom, and over time, have become detached from reality. Heck, it has become so bad, even when they buy a new car, they’ll pay extra to be equipped with On*Star because tracking and cabin recording is free for 6 months. Then, they voluntarily pay to be tracked and recorded.
I always found it amusing in 2004 when people were writing these letters because they were basically begging to take on an asset doomed to crash in price.
That’s what they’re doing now. These letters are a reliable bubble insanity peak indicator.
When people are begging to buy something enough to write sappy letters and bid up the price, then you may know the peak is not far away.
If interest rates go up, the buyers begging for properties today might end up underwater. It would be interesting to see how reliable an indicator the sappy letter is for predicting future declines. It was certainly right in 2004.
When enough people choose perceived safety over unintended consequence; a “new reality” is created. This situation holds true for many facets of life: bank accounts, home loans, economies, unemployment, retirement, agriculture industry, wages, food safety, assault rifles, student loans, public education, ad infinitum…
It is the job of the idealist to FORCEFULLY KICK the camel’s nose when it tries to get under the tent. We did not do that.
What can be done if a dozen camels are already IN the tent?
I admire your idealism. I think mine has been beaten down by a herd of camels.
Good Friday Humor article.
Here’s what I want to know.
Down payment rule for mortgages draws near for housing market
1/18/13 8:33am
As bankers, real estate agents and others in the housing industry absorb thousands of pages of mortgage rules issued in the past week, they’re still waiting to see if U.S. regulators will set a minimum down payment for home loans.
Regulators including the Federal Deposit Insurance Corp. and the Federal Reserve drew protests in 2011 when they proposed a rule requiring lenders to keep a stake in mortgages with down payments of less than 20 percent. Bankers and consumer groups said such a requirement would shut creditworthy borrowers out of the market.
Now, regulators say they expect to release a final version of that so-called Qualified Residential Mortgage rule in the next few months. Together, the QRM rule and additional measures governing underwriting and servicing released by the Consumer Financial Protection Bureau in the past week will fundamentally reshape who can lend and who can borrow because banks will probably make only those loans that conform to the new standards.
“I have consistently warned of the regulatory tidal wave to come and it’s finally upon us,” David Stevens, president of the Mortgage Bankers Association said during a speech in Washington on Jan. 16. “These changes will impact business operations and the future of mortgage access for years to come.”
Stevens said his organization has received hundreds of e- mails and telephone calls from members trying to understand the new regulations, which were mandated by Congress in response to lax underwriting standards before the 2008 financial crisis.
Underwriting Rules
The so-called Qualified Mortgage rule issued by the CFPB Jan. 10, weighing in at 804 pages, requires lenders to verify borrowers’ ability to repay their loans and offers legal safe harbor for lenders who follow guidelines for safe mortgages.
The CFPB offered strong legal protection for loans on which borrowers’ debt payments are no more than 43 percent of their income. Points and fees for such mortgages can’t be more than 3 percent of the total loan amount. Loans backed by the government through Fannie Mae (FNMA), Freddie Mac, and the Federal Housing Administration automatically qualify for legal protection for the next seven years.
The CFPB stopped short of adding a requirement for a minimum down payment. Now the six regulators drafting the separate QRM rule, including the Department of Housing and Urban Development, the Office of the Comptroller of the Currency and the Securities and Exchange Commission, must decide whether to include such a requirement — and whether to make it less than the 20 percent they originally proposed.
Wouldnt have to “regulate” or legislate anything if we actually had free markets and capitalism.
I’ve come to the conclusion those days are gone forever.
Free Market Capitalism never goes away. It is the sum of free individuals’ human will. Market forces never sleep. Societies temporarily try to fight these forces until they run out of money, damning their population to poverty. This time is not different.
I’ll take it one step further, because the US has a mortgage tax on Freddie and Fannie loans, so keeping them generates taxes. This fee is expected to increase in 2013. This fee is different from the G-fee charged by Fannie and Freddie, it get routed to the US Treasury.
I don’t think you should worship “free markets” as the answer to all ills, anymore than I think people should worship government as the answer to all problems. It’s cute, and sounds good, but a completely free market would not likely benefit anyone here much.
One can either be a free market capitalist or a collectivist. There is no such thing as half-pregnant. A mixed economy is bullshit collectivist propaganda. It is the camel’s nose under the tent. It stems from our fear of consequence and our misguided hope that a central authority can mitigate the effects of it. It can’t.
Why does IrvineRenter roll over in his ideas of embracing free market forces? Because collectivism self-perpetuates and thus demoralizes the individual. It is self-defeating. He knows this deep down, but I’m not sure if he is willing to recognize it. At this point, most of us really have no idea how to remove the government meddling. The proof is in the pudding.
Fighting free market forces, as the road to collectivism does, lowers standards of living and eventually bankrupts the currency. Who exactly does that benefit?
I think we do have a Fannie, Freddie, and FHA problem. Politicians used the GSE resources for political gain. Even if we could return them to pre-1992 status they have been abused before and will be again. We just can’t guarantee mortgages in the long term and we need to stop.
I think if you transition them to private companies and passed s Texas type financing law where you can only get financing up to 80% of value. This law will stabilize the housing market better than a complex series of laws and government sponsored entities.
Because as long as these agencies exist will be used buy corrupt politicians to score political points to get re-elected. But this will never happen, everyone wants their 3.5% down payment mortgage.
Foreclosures expected to increase in 2013
Foreclosures declined in 2012 compared with the previous year, but RealtyTrac expects this year to be “book-ended by two discrete jumps in foreclosure activity,” according to the firm’s latest report released Thursday.
Foreclosure filings were doled out to 1.84 million homes in 2012, which is 3 percent fewer homes than in 2011 and 36 percent below the foreclosure peak in 2010 when 2.9 million properties received foreclosure filings.
In December, foreclosure activity fell 10 percent month-over-month to a 68-month low.
While down overall in 2012, foreclosure activity increased in the majority of judicial states, prompting RealtyTrac VP Daren Blomquist to call 2012 “the year of the judicial foreclosure.” Of the 26 judicial states, foreclosures rose in 20.
At the same time, foreclosures declined over the year in 19 of the 24 states that do not rely on the judicial process to complete a foreclosure. However, Blomquist said these states could begin to experience their own foreclosure backlogs due to recent state legislation that could slow the foreclosure process.
“We expect to see continued increases in judicial foreclosure states near the beginning of the year as lenders finish catching up with the backlogs in those states, and another set of increases in some non-judicial states near the end of the year as
lenders adjust to the new laws and process some deferred foreclosures in those states,” Blomquist said.
Currently, the national time to foreclose is 414 days, according to ReatlyTrac’s fourth-quarter data. The timeline continues to rise and is up from 382 days in the third quarter. In fact, the fourth-quarter timeline is the longest recorded since RealtyTrac began observing in 2007.
The longest foreclosure timeline in any state is 1,089 days in New York, followed by New Jersey with 987 days. Florida experienced a decrease in its foreclosure timeline, but with 853 days, it still ranks third in the nation.
Texas has the shortest foreclosure timeline at 113 days, but even its timeline rose in the fourth quarter, up 17 percent from the third quarter.
Florida reigned in the highest foreclosure ranking in 2012 with 2.11 percent of homes receiving a foreclosure filing during the year—well above the national average of 1.39 percent.
Florida was followed by Nevada (2.7 percent), Arizona (2.69 percent), Georgia 2.58 percent), and Illinois (2.58 percent).
While foreclosure activity declined in 2012, foreclosure inventory ended the year 9 percent above the level recorded at the end of 2011. In total, more than 1.5 million houses were either bank-owned or in the foreclosure process.
Again ranking at the top, Florida claimed 20 percent of the nation’s foreclosure inventory. California ranked second with 14 percent.
Negative equity decreased slightly in Q3 2012
As home prices increase, more borrowers are rising out of negative equity.
Recent data from CoreLogic revealed about 100,000 borrowers moved out of negative equity during the third quarter of 2012, bringing the total number of homeowners who transitioned from negative to positive territory in 2012 to 1.4 million so far.
In the third quarter, about 22 percent of residential properties with a mortgage were considered to be underwater, which translates into 10.7 million mortgages, down from 10.8 million properties in the second quarter.
“Through the third quarter, the number of underwater borrowers declined significantly,” said Mark Fleming, chief economist for CoreLogic. “The substantive gain in house prices made in 2012, partly due to tight inventory caused by negative equity’s lock-out effect, has paradoxically alleviated some of the pain.”
According to CoreLogic, as of the third quarter, about 1.8 million borrowers were underwater by 5 percent, which means they, too, could rise out of negative equity soon if home prices continue to rise.
However, about 2.3 million borrowers had less than 5 percent of equity in their homes and are in a state of near-negative equity.
When combining underwater borrowers and near-negative equity borrowers, CoreLogic found the groups together represent about 26.8 percent of all residential properties with a mortgage.
The total value of homes in negative equity also declined. In dollar terms, negative equity was reduced by $31 billion, falling to $658 billion in the third quarter from $689 billion in the previous quarter.
According to CoreLogic, the “decrease was driven in large part by an improvement in house price levels.”
“As we look ahead into 2013, we expect to continue to see more borrowers’ escape the negative equity trap and that will be a strong positive for the housing market specifically and the broader economy generally,” said Anand Nallathambi, president and CEO of CoreLogic.
Among the states, Nevada took the lead for having the highest percentage of borrowers who are underwater. CoreLogic reported 56.9 percent of properties with a mortgage in Nevada are in negative equity. The state was followed by Florida (42.1 percent), Arizona (38.6 percent), Georgia (35.6 percent) and Michigan (32 percent).
Together, the top five states account for 34 percent of all negative equity in the country.
11.5 unemployed construction workers competing for every available construction job
Builders broke ground on new homes at a yearly rate of 954,000 in December, a 12.1 percent jump over November and the highest rate since July 2008, the Census Bureau and HUD reported jointly Thursday. Applications for residential permits rose a modest 0.3 percent, and residential completions rose 1.6 percent.
Rebuilding in the wake of superstorm Sandy contributed to the increase in total starts as activity in the Northeast jumped to a pace of 85,000 from 70,000 in November.
The increase in starts—driven by a surge multi-family activity—was the strongest gain measured by number of units (103,000) since May 2006.
Economists had expected start activity to increase to a rate of 887,000. Permit applications, reported at 903,000, fell short of the forecast of 910,000. The report of November starts was revised downward to 851,000 from the originally reported 861,000—making the December increase larger—while the report of November permits was increased to 900,000 from the originally reported 899,000.
Single-family starts rose in December to a rate of 616,000, the strongest pace since June 2008. Single-family start activity for November was revised to 570,000 from the originally reported 565,000. According to the data, multi-family starts rose in December to a pace of 330,000 from November’s revised 268,000. The month-over-month increase in multi-family activity was the strongest since November 2011.
Multi-family starts accounted for 35.4 percent of total starts, the largest share since June 2008.
The data backs up the steady increase in builder confidence reflected in the monthly Housing Market Index compiled by the National Association of Home Builders. Although the index reported Wednesday for January was flat to December, it had risen before that for eight straight months.
According to the Census/HUD report, builders completed 535,000 single family homes in December, the strongest since June 2010, when builders rushed to complete work on homes so buyers could take advantage of the federal home buyer tax credit program. According to the latest government report on new home sales, completions are far outpacing sales activity, however. New homes sales for November, the latest data available, totaled 377,000.
The report on permit and start activity is good news for the beleaguered construction industry. According to the Bureau of Labor Statistics, there are 11.5 unemployed construction workers for every available construction job.
11.5 to 1 for construction workers, hmm.
I’d be curious to know what that number is for architects/drafters/associates in the architectural industry. Even skilled labor is probably 4 or 5 unemployed for every job opening.
I know many people who left the industry that would probably return if jobs were available. There is no shortage of pent-up supply for skilled labor in real estate development.
Architects have the highest unemployment rate of any learned profession requiring a professional degree and certification. A degree in architecture is less likely to lead to a job than almost any other.
Even at the top of the boom, architects were very badly payed, with an average salary of $34,000 a year. While most of these people aren’t in it for the money, I feel sure that most of them would like to earn at least as much as a typical good admin assistant and would really like to earn enough to justify their expensive degrees, let alone pay back the money they borrowed to get them.
The typical pay levels and high unemployment in this important profession speaks volumes about the disarray the profession is in and how bifarcated it has become. These days, you are either a low-paid hack “designing” the same off-the-shelf, cookie cutter designs that are blighting our suburbs and city neighborhoods alike with utterly forgettable and often downright ugly architecture that looks sad and past its time in a decade, or you’re a grossly over-paid and over-valued “starchitect” who designs public buildings, private commercial buildings, and tycoons’ villas with architecture that is more about being a high-tech stunt than being a beautiful and useful structure that will be relevant and useful 50 years from now.
Forgive my spelling- it’s late and I’m tired.
I meant PAID, not “payed” for Godsake, WTF is wrong with me tonight?
the second appraisal rule is really to prevent flipping fraud. It’s like a Friday news dump.
Agencies Issue Final Rule on Appraisals for Higher-Priced Mortgage Loans
WASHINGTON–Six federal financial regulatory agencies today issued the final rule that establishes new appraisal requirements for “higher-priced mortgage loans.” The rule implements amendments to the Truth in Lending Act made by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act). Under the Dodd-Frank Act, mortgage loans are higher-priced if they are secured by a consumer’s home and have interest rates above certain thresholds.
For higher-priced mortgage loans, the rule requires creditors to use a licensed or certified appraiser who prepares a written appraisal report based on a physical visit of the interior of the property. The rule also requires creditors to disclose to applicants information about the purpose of the appraisal and provide consumers with a free copy of any appraisal report.
If the seller acquired the property for a lower price during the prior six months and the price difference exceeds certain thresholds, creditors will have to obtain a second appraisal at no cost to the consumer. This requirement for higher-priced home-purchase mortgage loans is intended to address fraudulent property flipping by seeking to ensure that the value of the property legitimately increased.
The rule exempts several types of loans, such as qualified mortgages, temporary bridge loans and construction loans, loans for new manufactured homes, and loans for mobile homes, trailers and boats that are dwellings. The rule also has exemptions from the second appraisal requirement to facilitate loans in rural areas and other transactions.
The rule is being issued by the Board of Governors of the Federal Reserve System, the Consumer Financial Protection Bureau, the Federal Deposit Insurance Corporation, the Federal Housing Finance Agency, the National Credit Union Administration, and the Office of the Comptroller of the Currency. The Federal Register notice is attached. The rule will become effective on January 18, 2014.
In response to public comments, the agencies intend to publish a supplemental proposal to request additional comment on possible exemptions for “streamlined” refinance programs and small dollar loans, as well as to seek clarification on whether the rule should apply to loans secured by existing manufactured homes and certain other property types.
Rental backed securities not taking off. It’s not mortgage back securities have been that good this century.
Moody’s: Single-family rental equity securitization poses more risk
By Christina Mlynski January 18, 2013 • 10:12am
The “equity” structure favored by bankers for deals in which real-estate investors create securities backed by the rental payments of single-family homes poses significant risks to investors, Moody’s Investors Service noted in its research report.
Such a structure would expose investors to risks that are not typically present in residential mortgage-backed securitizations and commercial mortgage-backed securitizations.
More risk also means more potential legal challenges. Moody’s analysts Yehudah Forster and Kruti Muni noted a mortgage structure, by way of comparision, is a stronger deterrent to legal challenges.
“Even after a substantive consolidation, a mortgage structure would give the securitization investors and not the sponsor’s creditors the first rights to the value of the properties because the consolidation would not extinguish the first priority lien on the assets,” the analysts noted.
They added, “On the other hand, in an equity structure a sponsor’s creditors would share in the value of the entire asset pool if they could successfully cause a substantive consolidation.”
The risks would include securitization not having senior rights to the properties following a sponsor’s bankruptcy, the unauthorized sale of the properties and other liens trumping the securitization’s claim on the properties.
“As a result, although these structures are more economical for the issuer owing to the lack of mortgage origination and registration costs, the credit quality of these structures is unlikely to be strong enough to support bonds with a rating higher than Baa absent strong mitigating factors such as a highly rated sponsor,” the report said.
Thus, such a low investment rating could shrink the pools of possible buyers.
The equity structure would also expose investors to other property-level risks because having no mortgages on the properties leads to risk of unauthorized sales of properties and addition of liens eroding the issuer’s value in the properties.
These types of risks are less significant than bankruptcy risk because typically in the normal course, the whole pool is unlikely to suffer these issues, only a portion of the pool.
Ultimately, the choice of structure depends on the economics – whether sponsors believe that investors’ willingness to pay for the additional protection that having mortgages afford will outweigh the costs of originating and register the mortgage.
However, mortgages that may be quite expensive to originate are not necessary to make single-family rental property securitization work, the report said.
“Even without mortgages, an equity structure allows the securitization to foreclose on the equity interest of the issuer and sell the properties if the income from renters is insufficient to pay off bondholders, albeit with substantial additional risk borne by the investors,” the analysts said.
cmlynski@housingwire.com
Tons of rules coming out today!
30% down Jumbo mortgages?
With New Rules, Prepare for More Paperwork
January 17, 2013, 9:29 p.m. ET
Private jumbo mortgages could soon become harder—and pricier—to get.
New rules announced last week by the Consumer Financial Protection Bureau will tighten lending standards in the private-mortgage market. The changes, which start in 2014, will ban lenders from issuing loans if they don’t verify a borrower’s income or assets.
The CFPB rules are meant to ensure that home buyers have the ability to repay their mortgages. They also affect many affluent buyers seeking private jumbo mortgages, those that start after $417,000 in most parts of the country or at $625,501 in high-cost metro areas.
Low-documentation mortgages account for about 12% of the private mortgages borrowers signed up for from January through October 2012, according to the latest data from CoreLogic, CLGX +0.20% a real-estate analytics firm. Unlike full-documentation loans in which borrowers present detailed financial paperwork, such as tax returns, pay stubs and bank statements, low-documentation loans are sometimes given to wealthy borrowers who provide limited information.
While these borrowers can more than afford the mortgage payments, their financial statements don’t always prove that. Starting next year, if home buyers can’t provide enough paperwork to verify that they have the income or the assets to afford the mortgage, they’ll be ineligible for a mortgage—even in the private market, according to the CFPB.
Another change that could have a big impact on private jumbos: Interest-only loans, in which borrowers don’t pay principal toward the home for a certain period, will be restricted. As a result, some lenders are questioning whether they’ll continue providing private loans that don’t meet the CFPB’s “qualified mortgage” criteria.
“All lenders are going to have to think very hard before we expose ourselves to liability,” says Tom Wind, executive vice president of residential lending at EverBank, EVER +0.06% a national lender.
Lenders who continue to provide interest-only mortgages next year could face greater liability in lawsuits filed by borrowers in foreclosure. If they default on their loan, borrowers of these non-qualified mortgages could argue that the lender didn’t do a thorough job confirming that they could afford it.
Interest-only mortgages account for roughly 14% of the private mortgages originated during the first 10 months of 2012, according to CoreLogic. Well-off borrowers often choose these lower monthly payments in order to invest the savings elsewhere.
EverBank will continue originating interest-only private mortgages for now but will re-evaluate its strategy toward the end of the year, Mr. Wind says. And Jim Cutillo, chief executive of lender Stonegate Mortgage Corp., based in Indianapolis, says his firm will have to change how it approves borrowers for adjustable-rate mortgages, given the new rules.
With ARMs, lenders can currently approve borrowers based on the initial rate of the loan, even though the rate will vary in the future. But in order for an ARM to be originated starting next year, lenders will have to approve borrowers based on the loan’s “fully indexed rate.” That’s the margin the lender has on that loan plus the index the loan is pegged to. For instance, an ARM with a 225-basis-point margin that’s pegged to the one-year Libor, currently at 0.82%, would have a fully indexed rate of 3.07%. Because this fully indexed rate is typically higher than the initial rate of the loan, Mr. Cutillo says, some applicants will find that they qualify for a smaller mortgage under the new rules.
Separately, the new rules could lead to higher overall rates for private loans since lenders may price in more risk, says Sam Khater, senior economist at CoreLogic.
For now, luxury buyers should strategize if they plan to get a mortgage that doesn’t meet the CFPB’s new standards. Some points to consider:
• Act soon: Would-be borrowers might want to move forward with their mortgage applications and line up their paperwork between now and the summer—especially if they’re planning on getting a low-doc mortgage.
• Fewer options: Currently, it’s possible to get an interest-only mortgage in both the government-backed and private mortgage markets. Starting next year, borrowers who want this loan will likely have to turn to the private market, possibly leading to longer waiting periods. Also, fewer lenders will be offering mortgages with a balloon payment, which starts out with regular monthly payments but requires the borrower to pay the remaining balance after a few years or refinance.
• Large down payments: Most lenders will continue to require down payments of at least 30% on private mortgages. That threshold could rise as more rules are announced.
Unbelievable.
It would be wise to collect and catalog as many of these sappy letters as possible for historical value. It would be good case study material too for a future college course that must be called Finance 452: The Great Housing Bubble and Crash.
Those letters happened 8 or 9 years ago already, but people seem to quickly forget this kind of ridiculous human behavior during manias. Fortunately, it’s not every day that there’s a massive asset bubble, run up and market crash that affects the globe.
I wonder too whether this “sappy letter” phenomenon existed in Spain or other formerly white hot real estate markets too? Or is this behavior of pleading and begging to buy a house distinctively American? So Cal Orange County? I think we know that some people choose to imitate art (TV/movies) quite a bit in their lives.
[...] 28 Canyon Island Dr 28, Newport Beach, CA 92660 (MLS # … … Read the original here: Sappy letters to sellers return in tight supply market » OC Housing … ← National Mortgage Forgiveness Plan | Alvicia | [...]
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