March, 2008 - DC Region Edition

Mortgage News
Higher conforming loan limits are coming!
Borrowing costs are going down for some purchasers.

On February 13th, President Bush signed bill H.R. 5140 (the Economic Stimulus Act) into law. Among other provisions, this law will raise the loan limit for conforming mortgages in many markets throughout the U.S.

As loan delinquencies have risen and many lenders have shut down, mortgage companies have become less willing to write new mortgages unless they can be sold to Freddie Mac and Fannie Mae (the government sponsored mortgage finance companies.) Under federal rules, these entities are only allowed to purchase mortgages up to $417,000 (called “conforming” mortgages). By contrast, loans above $417,000 (called “jumbo” mortgages) are held in lenders’ portfolios or are sold to other types of financial institutions. As a result, the interest rates and terms on “conforming” mortgages have become far superior to “jumbo” loans.

In an effort to boost the mortgage market, H.R. 5140 will increase the conforming loan limit on a regional basis to a level calculated as 125% of each region’s median home price. It’s expected that in the Washington D.C. region (with its high home values) the new conforming loan limits could jump by $150,000 or more, enabling thousands of area homebuyers to finance their purchases through conforming loans.

The Department of Housing and Urban Development (HUD) has 30 days from February 13th to determine median home prices on a region-by-region basis. After that point, it may take some time for the lenders to make technical changes to implement the new limits.

When that happens, we’re expecting a small surge of homebuying in the $425,000 to $700,000 range. At Corus alone, we have dozens of homebuyers who expect to be buying homes within this price range once the new limits are implemented.

Keep in mind that this change in loan limits is temporary – it expires at the end of 2008.

Lately, we’ve talked to a lot of real estate investors who are interested in foreclosures. Interestingly, many of these investors have preconceived notions that foreclosure auctions represent the best way to get great deals on foreclosed properties. Not true.

Fact: Buying foreclosures on the courthouse steps is not a good deal, and is not practical.
In many jurisdictions around the area, the foreclosure process involves an auction on the steps of the county courthouse. However, these auctions are only beneficial for purchasers in cases where the property is worth significantly more than the amount of the mortgage on the property – a rare instance these days. So if the bid price at auction is not more than the amount of the loan, the lender will purchase it for the loan amount. Today, few (if any) buyers show up to most foreclosure auctions.

Fact: Most foreclosures are listed in the MLS, alongside other properties.
Most lenders use real estate brokerages to dispose of their portfolios of foreclosed properties. In fact, Corus Home Realty has an active foreclosure division, and currently sells foreclosures for six major financial institutions. Real estate brokerages such as Corus will evaluate each property, perform repairs and clean-up, and will list it for sale.

Fact: Many foreclosures are in great shape, and some are high-end.
We’ve seen many foreclosures being sold in very poor condition – homes literally demolished by the homeowners during the unfortunate process of foreclosure. However, there are also many foreclosures that are in like-new condition. And not all foreclosures are low-end. Locally, we have several $1mm+ foreclosures, and one of our investors recently informed us about a $4.5 million out-of-state foreclosure. Bottom line: If you’re looking for a good-condition, well-located family home, it’s OK to consider foreclosures.

Fact: Foreclosures can be great deals.
Even though foreclosures are listed in the MLS alongside regular listings, they’ll often be priced a lot lower. Put simply, the lenders are eager to get these properties off of their balance sheets and are willing to be aggressive in their pricing. Furthermore, lenders won’t be insulted by low offers. To them, it’s all business, and unlike homeowners, they have no emotional tie to the property.

Are there other ways to find foreclosures?
Yes. Some lenders have been experimenting with their own auctions, and have sometimes utilized the services of nationally-recognized auction companies to sell multiple properties at once. These companies also sell non-foreclosure properties whose owners wish to sell them quickly. In any case, these auctions are very different from the “courthouse steps” auctions mentioned above. Lenders and auction companies publicize these auctions through real estate brokers such as Corus, and work with these brokers as part of the process. Additionally, some lenders have sold portfolios of properties directly to investors. But in these cases, dozens or hundreds of properties change hands.

For more information about buying foreclosures, call Corus Home Realty at 888-812-6787 or send us an email at corusinfo@corushome.com.

Woodbridge, Virginia is one of Washington DC’s outer suburbs, located about 20 miles south of the city along I-95. To many in the Washington area, it’s known for Potomac Mills Mall, Ikea, and its sprawling suburbs.

Lately, it’s become known for its foreclosures, short sales, and a tremendously depressed real estate market. During the month of December, two Woodbridge zipcodes were among America’s 100 zipcodes having the most foreclosures. Some Woodbridge neighborhoods have a staggering 2 to 3 years’ worth of inventory. And in some neighborhoods, prices are way down – some distressed properties are selling for 50% of their 2005 prices.

To us, this smells like a bargain. Here’s why:

• Many of these properties are selling at prices that are below their replacement cost. Assume construction costs of between $95 and $120 per square foot (assume half that figure for basements,) and estimate a modest land value. To us, if you can buy it cheaper than you can build it, it’s a good value.
• Rental yields are rising. While the sales market remains slow, the rental market is healthier. On many properties, an investor putting 30% down can generate good positive cash flow from the first year onward.
• In Woodbridge, you can actually purchase a single family house for under $200,000. Compared to nearly every other Northern Virginia suburb, that’s a very low entry point.

There’s a lot of distressed housing out there, particular in the Washington area’s outer suburbs. Among the distressed properties, you’ll find short sales and foreclosures. A foreclosure (also called an REO property, or bank-owned property) is a home that has been taken over by a mortgage holder due to a default by the homeowner. In this case, the buyer would purchase the property from the lender. For Corus Home Realty, representing the purchaser of a foreclosure is more complicated than handling a “typical” transaction, but it remains a straightforward process.

A short sale is a different story. Here, the homeowner still holds the property, but is “upside down” on their mortgage. In other words, the amount the homeowner owes is more than the proceeds they’re likely to get from the property’s sale, and they do not have the cash to make up the difference. They are attempting to sell the property, but can only do so if their lender is willing to accept less than full principal repayment. As part of accepting any offer to purchase the property, the homeowner must get approval from their lender.

This is where things can get tricky. On average, lenders are taking 4 to 6 weeks to approve short sales. During this time, the lender assesses the property to ascertain whether it’s being sold at fair value, and also attempts to determine whether the homeowner is trying to take advantage of the situation. The bank may also have an internal approval process.

At the completion of this process, the lender may say “no” to the short sale if they determine that the price being paid for the home is too low. In other cases, they may simply be unwilling to take the write-down on their loan.

Lenders may also counter a buyer’s offer in surprising ways. In a short sale, the homeowner sets the property’s list price. Even if a buyer offers full list price for the property, the lender may reject that price and put forward a counteroffer above list price.

Things get even more complicated if the property has two mortgages, particularly if those mortgages are held by different lenders. Short sales must be approved by both lenders, and in a short sale, the two lenders must agree on how much of the principal shortfall is being absorbed by each lender. We’ve seen many cases where the two lenders cannot agree on how much of a “haircut” they’re each taking, thereby preventing the short sale from occurring.

The short sale process varies a lot from lender to lender, and some are definitely better to work with than others. Also, an experienced listing agent can be helpful in helping to move the process forward.

So, if you’re interested in purchasing a short sale, prepare to have your patience tested. The homebuying process will be slow, and you may wait a long time only to hear a “no” answer to your offers. And if you’re looking to buy a house quickly, we recommend that you avoid short sales.

There is one caveat. The better real estate agents in the short sale business will attempt to have their short sales “pre approved” by the lender. In other words, as listing agents, they’ve gotten the lender to approve a home sale at a given price before they list the home on the market. If a buyer offers that list price, the transaction can happen quickly.

On the other hand, many short sales eventually become foreclosures. Once that happens, the homebuying process becomes a lot easier. Check out our article on foreclosures.