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29 Jul, 2011

If you qualify mortgage rates are great.

The Miami Real Estate Club read that with interest rates near rock bottom and home prices down, this ought to be a great time to buy a home. But for most people, it's a lousy time to get a mortgage.

Years after the collapse of the real-estate market and resulting financial crisis, it takes nearly pristine credit scores and hefty down payments to get the best rates.

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"Since 2009, credit has become a lot tighter," says Greg Reiter, who follows mortgage-backed bonds at RBS Global Banking & Markets.

For borrowers, this highlights the need to pay close attention to credit scores. New rules unveiled last week should make it easier for consumers to see how their credit scores affect the interest rates they pay. These rules, the result of last year's Dodd-Frank financial-services legislation, require banks and other lenders to disclose to consumers the scores used to determine interest rates charged borrowers, or to deny credit.

The new reality for borrowers can be seen in the FICO credit scores on the loans that banks are giving out and that are backed by government agencies Fannie Mae and Freddie Mac. These days the two agencies essentially finance 75% of all mortgages by purchasing the loans from the banks. In the process, they shape how much it costs to borrow.

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FICO scores range from 300 to 850. Pre-crisis, a score of 700 to 725 was deemed solid and a borrower could expect to get a "conventional" mortgage at the lowest rates.

From 2003 through 2006, 82% of Fannie Mae mortgages were for borrowers with a score between 700 and 750, according to data compiled by RBS.

But so far in 2011, only 13% of Fannie Mae mortgages carry that score, and just 1.7% have a score of 700 to 725, according to RBS. This year, 75% of Fannie Mae mortgages are for FICO scores of 750 to 775, up from less than 5% before 2005.

Meanwhile, the median score is 711, according to FICO.

"Half the population is locked out" from the best mortgages, says Mr. Reiter.

The upshot is that borrowing costs more even with a 730 score and a 20% down payment, says Norman Calvo, president of Universal Mortgage in Brooklyn, N.Y.

"Three years ago, if you had 730 it was excellent," Mr. Calvo says. Today, he says, it could cost an extra 0.125 percentage point per year on a mortgage, "just because you have one little nick on your credit report."

For more typical scores, the premiums are even bigger. At 700 to 725, it's usually an extra quarter percentage point, and at 630 -- if a borrower can find a loan -- the additional cost is 1.5 percentage points, Mr. Calvo says. "If you have a credit score of less than 680, you've got to be worried about approvability."

The news is also grim for those looking to refinance. Based on the level of interest rates, RBS estimates 60% of agency-backed mortgages should be eligible to refinance. But once home values and credit scores are factored in, just 12% are eligible.

These trends show the importance of understanding credit scores. Mr. Calvo says borrowers sometimes unintentionally make matters worse. For example, closing an unused credit card can actually lower a score in the short term, he says.

Check your credit scores at AnnualCreditReport.com. And to learn more about scores, visit the education section of myFICO.com.

28 Jul, 2011

Risky loans make a comeback

In a recent article the Miami Real Estate Club learned that after years as the lending market's undesirables, aspiring home buyers with less-than-stellar credit are being offered home loans again—with some of the same conditions and catches critics say tripped up subprime borrowers five years ago.

According to analysts, a handful of private investment firms have started making home loans to borrowers who fail to meet banks' requirements, which got tighter post-crash and have largely stayed that way. And for now they are holding them on their books, which is novel. At least two, Athas Capital Group, of California, and New Penn Financial, which is owned by Shellpoint Partners, of New York, are also making jumbo loans, or loans in most parts of the country that exceed $417,000, as the federal government appears to be scaling its support of that market.

The loans are designed to include borrowers with credit scores deemed low by banks' standards; they also have more-flexible requirements for proof of income. Banks have been too slow to extend credit to such people, the firms say, leaving otherwise responsible borrowers out in the cold—and potential profits on the table. "It's often a minor detail, why banks won't approve them," says Brian O'Shaughnessy, chief executive at Athas Capital.

Banks are following standards set by the market and reinforced by regulators, which focus on avoiding risk and losses with the uncertainty that exists now, says Bob Davis, executive vice president at the American Bankers Association.

The firms say this is far from the subprime lending of the go-go years. While they may embrace slightly riskier borrowers, they require higher down payments, around 40% on average at Athas Capital, compared with roughly 10% for a bank loan, says Keith Gumbinger, vice president at HSH Associates. And while they are willing to be flexible with income documentation, accepting a workplace pay stub or a series of bank statements in lieu of tax-return documents, they still require documentation as proof a borrower can repay the loan. This opens the door to otherwise qualified borrowers who have been foreclosed on, for example, or who may be self-employed or recently unemployed but are now back to work, says Chip Cummings, president of Northwind Financial, a consultant to mortgage lenders.

Critics say the loans are similar enough to the subprime mortgages of old that would-be borrowers should beware. They often have a so-called balloon structure, which requires the borrower to pay the remaining balance after five or seven years, or to refinance. And they are expensive, with interest rates of as much as 13%, the loans can cost more than double the average for bank mortgages. "You'd have to be fairly desperate to take that in the current market," says Guy Cecala, publisher of Inside Mortgage Finance.

Given the recent economy, that includes a lot of people.With housing prices still so relatively low, many people may want to buy, which analysts say could fuel a boom in this sector.

Also, starting in October, the government is expected to lower the limit on the loans it guarantees to as low as $271,050 in some places, in some cases a drop of almost $100,000. That, too, could open the door for these private financing companies.

"There are a lot of borrowers out there who aren't being provided for," Mr. Cummings says. "Private investment firms are filling the gap."

27 Jul, 2011

Home sales and prices reflect Malaise in Washington

Miami Real Estate Club discovered that home prices and sales of new homes lost ground in recent months, with real-estate agents and builders saying the debt-ceiling debate in Washington is rattling an already-fragile market.

According to the Standard & Poor's Case-Shiller home price index, released Tuesday, prices for existing homes in 20 major U.S. cities fell 4.5% in May from a year earlier, with declines stretching from coast to coast. Only Washington, D.C., saw a year-over-year increase. Compared with April, prices in May were virtually unchanged on a seasonally adjusted basis.

26 Jul, 2011

Why real estate listing fail

Earlier this year, a client asked Troy Deierling, a realtor in Sedona, Ariz., to set up appointments for three homes he'd seen online. Those viewings never happened: In spite of their supposedly current listings, Deierling discovered the properties had already sold. One had been off the market for three months.

As home buyers cautiously re-enter the market, they're arming themselves with information found online far more than existed pre-housing crash. A record nine out of 10 house-hunters searched online last year, according to the National Association of Realtors; around 15 million people now visit 6-year-old listings site Trulia.com each month. But with this great migration online has come a new set of obstacles, including errors, out-of-date information, and properties that are listed on the web but aren't actually for sale all of which can add up to a handicap for buyers. "You're probably going to get exposed to inaccurate information," says H. Pike Oliver, executive director for industry outreach at Cornell University's Program in Real Estate. "There's no real assurance."

The most common problems that Miami Real Estate Club found are simply errors -- listings that advertise gas heating when in fact the house runs on electric heat or a price cut that hasn't been updated online. But in some cases, "mistakes" may be intentionally misleading, such as touting a partly-finished basement as fully redone, or describing a kitchen as "eat-in" but only "if you were standing [up] with your plate," says New Jersey real estate broker Paul Howard. These discrepancies often appear on the listings that are posted on the Multiple Listing Service, an online database that listing agents are expected to keep current, he says. Separately, around 21% of the data realtors individually submit for posting on real estate web sites is not updated when changes are made to the price or when the property is sold, according to a report released last month by Trulia.

Of course, online misinformation is hardly unique to real estate listings. But because many of the online services are relatively new, and people buy houses so infrequently, home buyers may be less attuned to misinformation than, say, online daters. In general, it requires much more skepticism and diligence by buyers, experts say. For example, some real estate agents keep listings on their personal web sites long after they've sold; when home buyers contact the agent inquiring about the property, they're instead pitched new properties that might not meet their criteria, says Leonard Baron, principal of real estate consulting firm LPB Services and a lecturer at San Diego State University. Such lagging information is more common with smaller firms' web sites and could be a function of real estate agents simply forgetting to update those listings, says a spokesman for the National Association of Realtors. Either way, for buyers, it's a waste of time.

Online listings also seem to level the playing field when it comes time to make an offer, by including sales history and the number of days on the market information most buyers could previously get only from an agent. But "there are a lot of games that are played with 'days on the market'," says Mark Weiss, director of business development at Trulia.com. Properties that are listed for months can get removed from listing sites only to reappear as a new property for sale a few weeks later. That could be because a new listing agent has taken it over, says Baron; in some cases, a realtor can make a listing look new by taking the house off the market for a few weeks.

Popular real estate listing web sites say they try to update information often and they're on constant lookout for errors, but many sites rely on a feed from the MLS, which means it's largely the responsibility of individual realtors to update their listings. On Realtor.com, listings are revised daily as properties' status change, says the NAR spokesman. Trulia.com, which is where Deierling says his client found outdated listings, says it receives seven to eight million listings every day and it prioritizes information that arrives directly from franchises, brokers or MLS feeds. And like Trulia, Zillow says its goal is to give buyers easy access to a lot of information about nearby home values and market trends that can better inform buyer decisions.

For their faults, these web sites still offer home buyers more information than what was available even a few years ago. And that can help them make a more informed decision and eventually, an offer on a property. The point, consumer advocates say, is not to put too much faith in the information contained in a listing. The old shoe-leather tactics like talking to neighbors, getting crime reports from the local police, and asking a real estate agent to pull recent sales prices of similar homes nearby will trump most of the data in an online listing. "It's a reasonable way to start the search but not to finish it," says Barry Zigas, director of housing policy at the Consumer Federation of America, a consumer advocacy organization.

25 Jul, 2011

Foreclosed homes become TV stars

 

In a weekend read Miami Real Estate Club learned where the hundreds of thousands of foreclosed homes in the U.S. are ending up.On reality television.This summer and fall, several TV networks are unveiling reality shows about buying foreclosed houses as a way to reinvent the popular "house flipping" formula, which proliferated in cable programming alongside the real-estate boom.

In September, Viacom Inc.'s Spike TV will premiere a new show called "Flip Men" about an entrepreneurial duo living in Salt Lake City who try to make big bucks in the foreclosure market. Later this summer, Bravo's hit reality show about house-flipper-turned-designer Jeff Lewis, called "Flipping Out," takes a personal turn in its fifth season when it shows Mr. Lewis wrangling with lenders in a quest to buy a foreclosed house to live in. A&E Television Networks, a joint venture among Walt Disney Co., Hearst Corp. and Comcast Corp.'s NBC Universal, recently tapped a former "Survivor" contestant to star in a new show later this year about flipping houses—some foreclosed—in Houston. And DIY Network, a division of Scripps Networks Interactive Inc., has a show in development about flipping foreclosed houses that could air in 2012.

The foreclosure trend comes after years when shows about house flipping—where homes are bought, renovated and quickly sold—dominated cable programming amid the housing boom, eventually giving way to shows focusing more on home decoration, design and improvement as the real-estate market softened.

Reality shows about buying homes, such as HGTV's "House Hunters," first became popular more than a decade ago and then exploded with the real-estate boom from 2005 to 2007, when cable channels such as A&E and NBC Universal's Bravo launched programs about entrepreneurs profiting off the surging market, including "Flip This House," "Flip That House" and "Flipping Out."

When the financial crisis hit Wall Street in 2008 and the housing market began to unravel, many of these networks chose to retool those shows or take them off the air to keep current. New episodes of A&E's "Flip This House" haven't aired since 2009, and networks such as Scripps Networks' HGTV introduced programs such as "The Unsellables" about making over homes to help owners who can't sell their properties. The shows that weathered the storm and stayed on the air had to change their focus: Mr. Lewis, the star of Bravo's "Flipping Out," stopped flipping houses and changed professions after the economy slumped. To earn a living, he now designs homes for clients, and recent seasons of the show have focused on his new career.

"I was a successful house flipper but when the market fell, I had to completely reinvent myself," said Mr. Lewis, who lives in Los Angeles. He added that he expects "more and more" reality shows about foreclosed homes. "People want to watch programs that reflect the current reality, not a fantasy," Mr. Lewis said. That's a good reason to join your local Miami Real Estate Club.

On the fifth season of "Flipping Out," which began in early July, Mr. Lewis goes house shopping—for himself. He finds that about half of the houses he makes formal offers on, mostly in wealthy Los Angeles neighborhoods, are foreclosures or short sales. The house he settles on in the final episode of the fifth season was a foreclosure that, ironically, Mr. Lewis lived in for two years and sold for $2.8 million in 2006. He spent four months negotiating with the bank to secure the property, which was listed for about $1.7 million.

Bravo

Jeff Lewis of Bravo's 'Flipping Out.'Spike's new show, "Flip Men," follows its two hosts, Doug Clark and Mike Baird, as they attend auctions of foreclosed houses and buy up the properties—often sight unseen—and hope they get lucky.

Mr. Clark and Mr. Baird have bought houses where the interior is covered in mold and feces, infested by rats and, in some cases, still inhabited by angry—and sometimes violent—occupants. They also have purchased homes that vagrants have moved into and turned into methamphetamine labs, as well as houses that gangs have overtaken. In order to recoup their costs, they must fix up the homes as quickly as possible—and then attempt to resell them.

"These programs are like the ultimate game show because you don't know what's behind that door before you buy the house," said David Broome, executive producer of Spike's "Flip Men."

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