Home Ownership as an Investment, Home Prices, Inflation, Leverage & Home Equity

First and foremost, any home purchased needs to work as a home: it fulfills your housing needs at an affordable monthly cost – ideally, a cost, after tax deductions and principal pay-down, less than or similar to that of renting the property. However, though it cannot be compared on an apples-to-apples basis to investments such as stocks, bonds and CDs (that you don’t live in), it’s worth looking at the issue of homeownership as a financial investment as well.

Home-Price Appreciation vs. CPI Inflation since 1988

This chart compares, over 25 years, the amount of inflation per the Consumer Price Index (CPI) to price appreciation for high-price-tier homes in the 5-county San Francisco Metro Area per the Case-Shiller Index. (Most of the City of San Francisco’s housing is in the high-price tier, the upper third of Bay Area unit sales.) In this chart, 1988 equals a price-value of 100; 127 equals a price 27% higher than the price in 1988 for the same goods or house. CPI inflation is relatively slow and steady: the average across the past 25 years is a little less than 3% per year. Home prices, however, jump dramatically up (appreciation) and down (depreciation) depending on the market cycle, but average appreciation from 1988 to mid-2013 was about 5% per year – though this calculation can vary greatly by the exact start and end dates chosen.

An average SF Metro Area home purchased in 1988 appreciated by 244% as of July 2013, while the overall CPI inflation rate was 97%. If the home had been sold at the recent bottom of the market, the difference would have narrowed to 165% appreciation vs. 95% inflation. Purchase and sell timing always matters and if one has to sell at the bottom of the market, it affects the return on any investment. As the chart illustrates, home-price appreciation usually outpaces inflation by a significant margin over the longer term: this is a good thing for homeowners and doesn’t include other benefits such as living in the property and the capital gains exclusion on the sale of a principal residence.

This analysis applies well to homes purchased with all cash and no financing. Leverage alters the picture substantially.

Leverage (Financing), Inflation and Home Equity Growth

If one leverages one’s home purchase by taking out a loan, then the growth in one’s home equity dramatically outpaces inflation over the longer term. For the sake of simplicity, in the example above, we’ll assume that home price appreciation and inflation both run at 3% per year, and that the buyer put down 20% in cash plus closing costs, and financed the remaining 80% with a 30-year fixed rate loan. In this scenario, each year that the inflation/ home appreciation rate is 3%, one’s home equity asset grows by about 15%, plus the principal repayment on the outstanding loan (which is a major component – like a forced savings account – in the growth of equity over time). Indeed, the higher the inflation rate, the greater the equity growth. If home price appreciation outpaces inflation as well – as it has over the past 25 years – that accelerates the increase in home equity further. Moreover, the financing cost is currently subsidized by the mortgage interest tax deduction, if that applies to your financial situation.

This is why, using reasonable leverage, real estate is typically considered a good long-term investment – short-term can be much riskier – as well as an excellent hedge against inflation. Of course, if leverage is abused as it was in the years of subprime lending, underwriting standards decline, predatory lending and home-refinancing frenzy (i.e. “using one’s home as a piggy bank”), other risks arise.

In earlier times, when people didn’t move around as much, one bought one’s home, paid it off over the years and when retirement came, had a home owned free and clear – a huge financial asset to be used as appropriate.

Ongoing Homeownership Costs vs. Rental Costs over Time

In this chart, the increase in the annual cost of homeownership with a fixed-rate loan is compared with the increase in rent at a 3% inflation rate, and the increase in rent of a home subject to San Francisco rent control, where annual rent increases are limited to 60% of CPI. As seen, if one locks in a fixed mortgage interest rate, the increase in ownership cost is limited to the increase in property tax costs (limited under Prop 13) and maintenance expenses, while the entire rental cost may be subject to annual raises. Over the longer term, one’s ownership costs become more and more attractive when compared to rental housing costs subject to inflation. If one owned the home for the full 30-year loan period, the monthly mortgage payment itself would disappear.

We have generated two sample rent vs. buy scenarios for San Francisco here:

2-BR Apartment Rental vs. Condo Purchase and 3-BR House Rental vs. Purchase

And you can perform your own rent vs. buy scenario calculations here, using your own financial circumstances, assumptions and projections: Rent vs. Buy Calculator

Important caveats: Trying to compare buying a home to other financial investments on an apples-to-apples basis is impossible, because there are so many other variables at play: the use and enjoyment of the home, how the cost of homeownership compares to renting, physical condition decline over time (without further investment), risks and returns on other types of investments, home tax deductions, the capital gains exclusion on profit from a principal residence sale ($250k for single owner/ $500k for couple), market timing and other factors. All the analyses above are simply sample scenarios, looking at homeownership from a number of angles using a variety of assumptions. It is unknown whether they will apply to future trends.

As said in the first line of this report, first and foremost, any home purchased needs to work as a home: it fulfills your housing needs at an affordable monthly cost. If that’s where you start, with a fixed rate loan, and you don’t refinance out growing home equity, and you don’t have to sell during a market downturn (which, admittedly, isn’t always possible to avoid), then you should come out all right and more often, very well.

These analyses were performed in good faith, but may contain errors, are not warranted and should not be exclusively relied upon. Tax law and other factors referred to are subject to change. All information provided herein should be carefully reviewed according to your own circumstances, plans and economic projections with a qualified financial adviser and loan agent.

San Francisco Housing Market Not Stopping…How’s That For A Gift From Santa!?

In this season of giving and being thankful, I’d have to say that San Francisco Bay Area residents should be pretty thankful that our market is nowhere near that of the national average. If you’re a seller you can be thanking your lucky stars that buyers are out there in droves, and if you’re a buyer you need not pinch yourself, because yes, interest rates are indeed averaging UNDER 4%, and that is certainly something to rejoice.

The San Francisco Association of Realtors Market Focus Report begins now:

Although these fall months are not typically known for high real estate activity, this year has proven otherwise, with strong pockets of movement occurring throughout the city, keeping the market active during these shorter days. Families have been rushing to purchase and settle into their new homes to prepare for the holiday season and upcoming year.

Single-Family Homes

As the number of homes for sale fell throughout the city by 27.3 percent compared to November 2010, the number of homes under contract this past month rose by 21.1 percent, while the number of homes sold rose by a substantial 22.3 percent. For properties that were priced below $700,000, the months of supply inventory dropped by 67.8 percent to 1.3 months. For properties priced between $700,000 and $1.2 million, the months of supply inventory fell by 12.1 percent to 2.8 months. Readings between one and four months typically indicate a seller’s market, where sellers have more negotiating power over home buyers.

One part of the city which continues to experience healthy sales activity is the central district that provides ample shelter from San Francisco’s famous fog and is one of the city’s sunnier regions. Since November 2010, the number of homes sold has risen considerably by 60 percent to a total of 40 properties. From the colorful neighborhoods of Haight Asbury and the Castro, to the more contemporary and family-friendly Noe Valley, to the posh and upscale Clarendon Heights, this part of the city offers a diverse array of housing opportunities for just about any home buyer.

Another area of the city which saw heightened sales activity is the southern part of the city that stretches from San Francisco City College to beyond Candlestick Park. Compared to this time last year, the number of homes under contract in this district has risen by a whopping 80 percent, while the number of homes sold has increased by 58.3 percent to a total of 57 properties. Some of the neighborhoods in the area, such as the Excelsior and Mission Terrace, offer a suburban feel, easy access to public transportation, and some of the best prices in the city, which makes them great locations for first-time home buyers.

Condominium Sales

Although the number of condominiums for sale fell throughout the city by 37.2 percent compared to November 2010, the number of condominiums under contract rose by 17.7 percent and the number of condominiums sold increased by 23.1 percent. For condominiums that were priced between $500,000 and $900,000, the months of supply inventory contracted by 61.4 percent to a reading of 2.2 months. For luxury condominiums priced above $900,000, the months of supply inventory decreased, by 49.8 percent to 2.6 months.

One part of the city which experienced a robust increase in condominium sales activity is the central-eastern part of town, whose landscape continues to evolve from its former warehouse and factory occupied streets. Since November of last year, the number of condominiums sold has jumped by 56.4 percent, from 39 units to a total of 61. The central-eastern district includes such neighborhoods as up-and-coming South Beach, home to AT&T Park and some of the most stylish condominiums in the city, as well as SOMA (South of Market) and Yerba Buena, which has seen an infusion of moderately priced condominiums in recent years.


The Conference Board reports that consumer confidence surged in November to its highest level since July, a sign that Americans may be more willing to spend. The Conference Board said that its consumer confidence index climbed by 15 points in November to 56 points, the highest it has been since a reading of 59.2 this past summer. Although still well below a reading of 90, which indicates an economy on solid footing, the confidence numbers are encouraging.

According to the State Employment Development Department, the statewide and local job outlook continues to improve as California’s unemployment rate dropped for the second straight month in October to 11.7 percent. Bay Area counties were all below the State average, including San Francisco, which dropped to 8.1 percent from 8.3 percent the prior month.

As the cost of renting in the city continues to rise, and with the average rent currently at $2,572, more and more people should be considering owning a home. There are a variety of rent vs. buy calculators available online and anyone of them can be used to help with a decision as to whether to rent or buy.

As local tech companies like Zynga and Yelp prepare for initial public offerings, more and more of their employees are looking towards owning a home in San Francisco. Reuters reports that recent competitive bidding in some neighborhoods has pushed home prices up more than 15 percent from last year in some areas such as Noe Valley, SOMA and Potrero Hill.

With the improving economy and surge in pending sales, 2012 is likely to see a stronger San Francisco real estate market than what buyers and sellers have been accustomed to since 2008.

-San Francisco Association of Realtors Market Focus Report

Reader Reports: We Finally Were Able To Refinance! What A Nightmare! And Some Advice…

From a reader:

Dear theFrontSteps,

After TWO YEARS of intensive search and questioning and hunting ….we closed yesterday on our refinancing! We got a $600,000 loan at 4.5%. (no point, no refinancing costs, except for appraisal and recording fees).

By the way, the appraisal came back at $1,200,000, which made us laugh a good time. Having open walls and contractor tools in the house does help take the price down!!! Note: I followed the “uglyhouse” blog advice on everything else, and all the pics (gov requires all bathrooms, kitchen and living room pictures) came out 100% clean and staged.

Some thoughts:

No bank, nobody wanted to hear from us, still because we have only one income.

I contacted several brokers, including one who was contacted/recommended by our private banking. Brokers just don’t make it. The process throug brokers would drive anybody crazy. We recontacted our original loan issuer (the employee at wells fargo) and she refused to refi us.

We finally got our break when the WF branch at NoeValley opened a full time position in Mortgage consulting. That new guy was eager to add files on his desk and made it easy to refi without trouble. They made the decision to accept to refi based on nothing but our history of our current mortgage with them, and from there, it was just paperwork.

They needed 2 years of tax docs (the release is for 3 years). It’s not them, it’s a federal requirement. However, because WF does everything in house, our file was traced from one desk to another, and there was very little risk of leak /abusive use of information. The Noe Valley guy was very nice and helped us feel comfortable with their privacy practices.
Because it’s WF who has extensive in house info on our accounts, they did not bother us too much about the stuff in our tax doc that we consider both confidential and not relevant for the loan (namely the foreign real estate, but also the adoption stuff, etc). They were super cool and requested only a proof of insurance (checking the existence of the foreign property).

It was still a very painful process of administrative work and I would recommend that you help your readers CLEAN their finances before (as long as possible) they consider applying for a mortgage. Things like NOT changing bank, NOT closing or opening or transferring bank accounts, investing in a (real) accountant to file one tax return to make sure there is a pristine year (thus less questions from the bank and less discrepancies) etc.

There are mortgages to get, but only if you want to fight for each one.

It was worth it. Thanks again for your extensive help and support over the years.

Thanks for the update, congratulations, and good luck!

Here We Go Again With The Lending

Intercepted from inter-office emails:

Great News,
We are now offering Fannie’s new HomePath loan program! Let your clients know these improved loan terms to generate new business. Essentially, the program has the clients using Fannie loans to buy foreclosed properties owned by Fannie, therefore Fannie gives improved loan terms to the buyer.
-97% FINANCING WITH NO MORTGAGE INSURANCE ( That’s a lower monthly payment and lower closing costs)
-NO APPRAISAL REQUIRED SAVING YOUR CLIENT TIME AND MONEY (Value is selling price determined by listing bank)

Email or call me with client loan scenario’s that can benefit from this awesome program.

Successfully [not Sincerely],

[Loan Guy]

It seems we’ve heard this before?

FHA Checklist For Spot Loan Approvals

We get a lot of questions about FHA loans these days, particularly if we know what buildings will qualify for FHA loans in San Francisco. There is a simple answer to that question, “No, we don’t know.” But other people do, and those people are loan experts…mortgage bankers/brokers… and luckily they feed us information to feed to you.

_______ 1. The legal documents of the homeowners association do not contain a right of first refusal or restrictive covenant.
_______ 2. The unit is part of a condominium regime that provides for common and undivided ownership of common areas by unit owners.
_______ 3. The project, including the common elements, and those of any Master Association, are complete, and the project is not subject to additional phasing or annexation.
______ 4. (a) There are no special assessments pending.
______ (b) No legal action is pending against the condominium association, or its officers or directors.
______ 5. The common areas have been under the control of the homeowners association for at least one year.
______ 6. At least 90 percent of the total units in the project have been sold. Verified by _________________________.
______ 7. At least 51 percent of the total units in the project are owner-occupied. Verified by ______________________.
______ 8. There are no adverse environmental factors affecting the project as a whole or individual units .
______ 9. No single entity owns more than 10 percent of the total units in the project. Verified by ______________________.
______ 10. The units in the project are owned in fee simple or the units are held under a leasehold acceptable to FHA. Leasehold in file.
______ 11. The owners association has adequate common area insurance coverage. General liability, replacement coverage, etc. reflects the character, amenities and risks of the
particular development. Flood and other insurances carried, when applicable.
______ 12. General maintenance level of common elements is acceptable and there is no deferred maintenance, based on the comments by the Appraiser and/or the pictures.
______ 13. The owners association has a reserve plan and a reserve fund, separate from the operating account, that is adequate to prevent deferred maintenance. The amount of the fund is $_________ as of __________.
_______14. (a) For projects consisting of over 30 units, no more than 10 percent of the total units are encumbered by FHA insured mortgages. Verified by ___________________.
_______ (b) For projects consisting of 30 units or less, no more than 20 percent of the total units are encumbered by FHA insured mortgages. Verified by _______________.

Simple as that…

-FHA Checklist for Spot Loan Approvals-pdf

Ask Us: Refinancing And Appraisals, When The Banks Aren’t Helpful Turn To The Blogs!

Where readers ask, and we (the community) try to answer:

I appreciate all the general information I get from this terrific blog. This is my first question about my own situation.
I’ve been negotiating with the major bank (WellsFargo) that holds my first ($498K) and second ($14K) for a refinance from a 5.5% ARM to 4.75% 30 FRM [Fixed Rate Mortgage]. We paid 10% down and our second -a 5 year ARM is on schedule to be paid off before it adjusts in 12 months.
Our appraisal came back at less than the $625K required to refinance without PMI. Our bank just said “If you want this to go through, you’ll have to bring $28,000 to close.”
Is anyone finding any flexibility for strong credit rated, clear payment history etc? Or is the only way to get a break to stop paying and plead poverty? That would seem self defeating and yet, I’m not finding my bank to be helpful at all.
Thank you for any comments by anyone knowledgeable about this.

Yours truly is not a mortgage expert, and will defer to those that are, as I always do.

So How Much Does A Buyer REALLY Need To Put Down

As our regular readers know, we get every type of question under the sun, most of which we post directly to the site and let the community answer. Sometimes answers aren’t so cut and dry and there are certainly differing opinions. One very common question these days is “How much money do I need to put down” to buy a house. The long and short of it is to plan on 20%, but there are exceptions and we asked a mortgage expert, and generally the rules go like this:

3.5% to 30% –depends on loan amount.

Jumbo loans (greater than $625,000) require 30% down

Loans up to $625,000 require 20% down and smaller than $417,000 are min 3.5% (FHA) down.

Basic guidelines indeed, but something to keep in mind when looking for your home. Remember, these are LOAN amounts, not purchase prices, and any day that $625k limit will be raised to the new $729,750 amount. You can also get FHA loans up to $729,750 and put as little down as 3.5% (we’re told); however, for most condo developments, you are required to put at least 10% down on FHA loans. It’s all really confusing, and if you have more questions, give us a shout and we’ll put you in touch with a mortgage expert. (thefrontsteps@gmail.com)

Ask Us: Remaining TIC Fractional Lenders

Where the readers ask and we (the community) try to answer:

Hi, just come across your site, very informative.

I’m trying to find TIC Fractional Lenders for a 3 unit + 1 unwarranted [unit] building in SF. We purchased it last October, have completed our renovations, 2 units will be owner occupied. We’re planning to go to Andy Sirkin to draw up a TIC agreement, and refinance hopefully with cash out. We now have a group loan @ 6.75%, no pre-pay penalty.

I heard Bank of Marin is out of the TIC market. How about Sterling and Circle, any other lenders available? Appreciate any info and recommendation. Thanks!


Thanks for your email and question. At this time we only know of Sterling Bank, and Ron Whitney at Zephyr real estate says that a “7×7 Group” also does Fractional TIC loans. Maybe the readers can provide further insight. Regardless, good luck and thanks for reading theFrontSteps.

Reader Reports: Who’s Getting Your Loan Approved And Why?

“San Francisco’s number one closer”:

While you’re at it:


Once you are at the link, look for the “7 On Your Side” tab in the Video Library part of the webpage and click it.

You’ll see a picture with the heading “Marketing Ploy Disguised as Government Offer” and a HUGE Mike or Darius. That’s the video – watch it!

What’s the connection you ask?

The Loan Sharkz is a mortgage company that went belly up—Bryco Funding a few years back. It looks like the guy who answers the door [in the ABC local video] looks just like one of the guys who made the “Loan Sharkz” video and starred in it…

Indeed it does, and as always, thanks for the tip!

Anybody can be involved with this site. Send tips, story ideas, content, love (or haight) mail to thefrontsteps@gmail.com.

New Guidelines For Lending On Condominiums

This topic was discussed very lightly in a thread somewhere back on this site, but we thought it deserved front page attention. From “the Banker”:

I have found that there is a tremendous amount of uncertainty and recent questions in reference to all of the Condo Guidelines and Approval Changes that are directly hitting the San Francisco condo market. I will note that these rules are those issued by the Government Sponsored Enterprises, Fannie Mae and Freddie Mac.

There are exceptions to the rules and [my bank] does have certain projects approved, or grandfathered in before all of the changes. Also, because of the relationship [my bank] has with the Agencies, we also have the ability to request for Exceptions. This is a major advantage that [we have]!!!!

Here is a list of some of the new, potential pitfalls:

-New construction financing is being increased from 51% to 70%, again if not grandfathered in or currently approved
-No more than 15% of the projects’ units can be 30 or more days delinquent on HOA dues
-The project cannot have more than 20% commercial space
-Fidelity Insurance is required for Condos with 20 or more Units
-No more than 10% of the project can be owned by one entity
-A HOA must be in control for at least 1 year

Again, these are the guidelines and exceptions can be made.

As always, if you have more questions, feel free to drop us a line (thefrontsteps@gmail.com), or make a comment below. If you’d like to get in touch with “the Banker”, that can be arranged as well.

Ask Us: Modifying Condo Insurance Policy For Refinancing

Where readers ask and we (the community) try to answer:


I have been looking at your blog, quite a while, very useful. Thanks for all the work.

I have a question regarding refinancing, and hopefully you or your readers can help me.

I am refinancing with Wells Fargo with a locked 30 year fixed for a condo in SOMA. After all the word processing, Wells asked me for the HOA insurance contact, which I provided.

Now, my loan is on hold and cannot be approved because my HOA insurance was unwilling to add a mortgage clause by Wells. In general, the HOA insurance company only issued the certification for proof that the building is fully covered, no [declaration] page would be issued. (Which make sense to me, as HOA insurance policy covered the building, but not individual unit.) I understand, based on the information I found that some HOA will offer, but some don’t.

So now, here is my question, I have no control over the HOA insurance as an individual owner, I cannot make them issue the [declaration] page that Wells asks for, and Wells is unwilling to accept the certification, which worked in 2008 (my next door refinanced with Wells in 2008 with the certificaiton).

I am wondering whether this is a trick from Wells fargo to reject my loan application or if I should seek the property management/ HOA board to revise the HOA insurance policy? Or even if I should seek legal advice, because Wells is requiring some documentation way beyond my controls and making excuses.


Darn fine question! From what I can understand there is a miscommunication regarding the insurance declaration page? If that is the case, I’d simply work on getting that filled out to the satisfaction of Wells Fargo. It shouldn’t be that big of a deal, and you might just be talking to the wrong people at your HOA. If that’s not the case, you’ll have to clarify a bit. Regardless, I do not think you’d have much luck advising the HOA to modify the entire insurance policy for the entire building, and I doubt Wells is playing some kind of trick, but I’ve been known to be wrong.

Maybe “the banker” or another qualified loan expert could shed some light in the comments below.

Thanks for reading and thanks for your email.

[Update: Answer from "the Banker" that works at one of the remaining large banks and is definitely "in the trenches": "The HOA should not make the decision on adding a mortgagee clause, this should be the responsibility of the Insurance Agent who provides the coverage for the Condo. Part of your HOA fees are paying for the Insurance, so my advice would be to start there, call the insurance company yourself and have them add Wells Fargo as a Mortgagee, this has always been a lender requirement.

Now, perhaps the second part of your post. There have been some radical and rapid changes in regard to condo project guidelines, project requirements, and pricing add-ons. For the sake of simplicity, here are some of the key changes that have implemented, by most, if not all Lenders. One note, these new Rules and Requirements have been issued by Fannie Mae and Freddie Mac, so direct from the Government agencies.

-Only 10% ownership by one single entity
-No more than 20% commercial usage
-Up to 70% Presale Requirements, new construction
-Price add on’s for Loan to Values above 75%, usually .75 in price, not rate
-Delinquent HOA’s of more than 30 days cannot be greater than 15%
-Owner occupancy requirements, 51% and above

There are exceptions to the rules, but from what I have seen this year, they are few and far between.

I hope this helps and good luck."]

Ask Us: Can The Bank Take My HELOC?

Where readers ask and we (the community) try to answer:

Question for any mortgage experts out there. I have a large heloc line. If I don’t use the line, I am at risk that the bank will decide to take it away. If I use the line (even if I keep it in cash), can the bank call me on it (i.e., slash the line anyway and tell me to pay it back)?

For the readers out there that follow the comments, you’ll know this question came up yesterday, but as we know only about 10% of you actively participate in comments, we thought we’d put this to the front and fish for some more (not necessarily better) answers.

Mortgage experts? This one is for you….

One reply yesterday from our very own “the Banker”

Great question. Draw the money and draw it today. It certainly depends on your equity situation and the neighborhood/city that you live. But, it is far better to pay the interest for a few months as opposed to having the line freeze up. If the lending standards lighten, then perhaps you cost yourself some “mortgage interest,” perhaps a writeoff, unless you exceed the cap.
Until, there is truly resolve, banks will continue to constrict. But, look for my next post, perhaps this housing bill may make a little sense.

Any other experts, please answer in the comments below.

Ask Us: Lending On Homes Over $1,000,000

Where readers ask and we (the community) try to answer.

Can you have someone, maybe “the banker”, speak to the loan environment and requirements for loans on homes over 1 million dollars? Thanks.

Banker? You reading? You can either send us your answer via email, or post in the comments and we’ll cut/paste to the front.

[Update: It took him all day ;-), but "the banker" chimed in...]

Jumbos are certainly still available and with a watchful eye and the right advice, the pricing is not absurd at certain institutions. The number that seems to be consistent with Jumbo Financing is a 70% Loan To Value, perhaps some banks may max out at 75%, but most counties are considered to be declining market and stuck at 70%. In terms of product types, these are few, 30 year fixed and a 5 year Arm may be the only two choices left. Within the fixed and adjustable choice, there may be a few interest only options to choose from.
Standard credit requirements are at least 720, Full income verification, and strong asset position, at least 6 months to 12 months of reserves.
Jumbo rates have been all over the board, but I have recently seen mid 5’s, no points, standard Bank fees. But, this is a Bank Loan. . .I am not certain Mortgage Brokers have many options on the Jumbo side of the game as many of there vendors have ceased making this type of loan or have shut down completely.
As we continue to see falling prices, this will be one of the most “cautiously monitored” loans, but as updates occur. . .I will make sure to post.


The Appraisal Conundrum

With the recent dip in interest rates many homeowners are rushing to refinance only to come upon a very large obstacle, appraised values of their homes are coming in low…very low. The biggest reason being that there are not enough comparable property sales in the past 3 months to set lenders nerves at ease. Perhaps you are having better luck than this, but we personally have had clients call and ask how this little problem might be alleviated.

So what can you do? Hopefully “the banker” will chime in with a little insight from that of the lender, otherwise, we’d suggest contacting your Realtor, asking for as many comparable sales as they can come up with, talking to your appraiser, taking them golfing or to lunch, buying them nice bottles of wine, and getting them backstage. If that doesn’t work, the most simple advice we can give is an old saying, “If at first you don’t succeed, try, try again.” There are many appraisers out there, and there are many mortgage brokers (okay, not as many as there were) that will do what they can to earn your business. Shop around, find the broker that will not only get you the best rate, but also get the deal done. Keep in mind, sales that happened as little as six to nine months ago may really not apply depending on your property. Yes, the market has changed that much, that fast, in some parts of San Francisco. Others…not so much.

Do you, the reader, have a recommendation for a broker that you recently used? Did you have this same problem and how did you get around it, if at all? We’d love to hear your stories and thoughts, because we’re all in this together and we can all learn from each others mistakes and triumphs, so share the goods. You know we’d do the same.

Ask Us: Your Mortgage Insurance Company Drop The Ball Too?

Where readers ask and we (the community, because Lord knows we don’t know everything) try to answer:

Hey there,

Wondering if anyone else there has gotten wind of a problem we’ve been running into:

My partner and I put in an offer on a 2 bed/1 bath condo in the Mission in mid-November. Offer price was $740K, and we put down $75K. A mortgage broker had confirmed that he would be able to get a loan with only ~10% down, as my partner and I both have steady jobs with good income (~$200K/year total), and our credit scores are both around 800. We went through the whole process and the loan came through fine, but the deal fell through at the last second because the mortgage insurance company claimed that they had had a significant change in policy a few days before and were “no longer insuring condos with loan amounts over $650K in California.”

We moved on to a lender at Bank of America, who assured us that “they have different relationships with the MI companies” than the brokers do. We gave him the whole story, but lo and behold–same exact thing happened. He acted all surprised and said that even the MI underwriter had just told him the day before that everything looked good, and then she found out about this new policy (which supposedly went into effect 11/30).

The MI company both lenders were trying to use was Radian, but they supposedly weren’t able to find a work around with any of the other MI companies, either. It just seems strange that none of the lenders we’ve worked with (we’re on our 3rd one now and fully anticipate running into the same problem, though he also is assuring us it won’t happen but can’t even tell us what MI company they use) seem to know about this at all. And it seems odd that the mortgage insurance underwriter didn’t find out about it until reviewing our application in mid-December after the change went into effect 11/30.

Has anyone else run into this? Is nobody in this city buying places that require MI anymore? Any thoughts or ideas on ways around it? Thankfully the sellers have been very patient and understanding–I can’t say that I would have been if I were in their situation, but we’ve done everything we can.


Thanks for the email and question. We’re sure there is someone out there (the Banker) that might be able to shed some light on this, or perhaps another buyer. Luckily, our recent transactions have been with cash buyers, or 20-30% down, and we have not experienced this. So….we’re calling on the community. Let’s not disappoint this reader, because all we can do on this end is thank him for hanging out on theFrontSteps, emailing in, and hope he comes back.

Taking Over Fannie Mae and Freddie Mac, Some Clarification

If you’ve been wondering what all of this Government takeover of Fannie and Freddie means, you’re hardly alone, so we just went ahead and copied what we just read to give you some different perspectives of what is being said in the real estate world. We take zero credit for this, it all came from the San Francisco Association of Realtors Advantage Online:

[Update: And we just discovered more info on Trulia].

“NAR: What the Government Takeover of Fannie Mae and Freddie Mac Means to Housing Industry

In short-term, home sales should improve as mortgage rates fall Continue reading

“Mortgage market weathers storms” – SFGate

Did we read that headline correctly? Is that quite possibly the first headline in over two years about the housing/mortgage market that doesn’t spell disaster? Or is it the shot of Tequila and can of Tecate (a bit of lime squeezed in and a touch of salt on the rim) talking?

Home loan applications are up, interest rates are down and financing continues to be approved, according to national data and local mortgage brokers.

The interest rate on a 30-year fixed-rate mortgage averaged 6.26 percent last week, down from 6.37 percent the previous week, according to Freddie Mac.

Mainstream media is getting soft! We kind of like it. But then you had to go ruin our party:

None of this is to say that the mortgage market has returned to normal. It is still far more difficult to qualify for a loan than it was before default rates shot up last summer, underwriting guidelines are in a continual state of flux and the housing market remains in a deep slump.

The number of homes sold in the Bay Area during June was the lowest for the month since 1993, down 9.9 percent from a year ago, according to DataQuick Information Systems. Across the nine [Bay Area] counties, the median price paid for all home types plummeted 27.1 percent to $485,000, slipping under the half-million-dollar mark for the first time in four years.


-Mortgage market weathers storms [SFGate]

Comment du Jour: Little impact from raising conforming loan limits, and the end of Stated Income Loans

Kelly McCray comes through with a comment that will be heard around the world!

I was at the east bay CAMB [California Association of Mortgage Brokers] legislative update meeting yesterday. It is becoming quite clear that there will be little, if any, impact with the raise in conforming loan limits. This news is disappointing to say the least. Fannie Mae is planning on charging a premium for loans over $417K, so what was the point?

And more…

I am very concerned for the consumer right now. There is a lot of legislation on the table both at the state and federal level that will make it extremely difficult for borrowers to obtain financing, with or without a broker. On the state level, stated income [loan] is very likely going to be outlawed. 100% financing is on the chopping block as well.

And you think we don’t report the doom.

Ask Us: Why choose a mortgage broker over a bank?

Where readers ask and we try to answer. Kelly are you listening!?

Why would a [mortgage] broker be better than a bank at this point in the market. I am an investor and have used brokers and bankers, both have been of great service to me in the past. But, I have relationships on both sides of the coin and it seems the playing field is level.

In the past I have used a broker for a faster turn time, more creative loan types, and reduced income documentation. Where as today, it seems as if there is no advantage to utilizing the broker. Perhaps the rate is a small amount lower(.125 at most), the fees are larger, there is more uncertainty and lack of control that the broker has in the grand scheme of things, and the banks they choose from, well, I have direct access to them. i.e, Wamu, Wells, Chase, Citi.

Please provide clarification for me. It seems like we have entered a 20 percent down world, regardless, and I would love some insight on the subject. I prefer to stay anonymous. Thanks

Since you preferred to remain anonymous on this, we had no way of contacting you to clarify the “and the banks they choose from, well, I have direct access to them. i.e, Wamu, Wells, Chase, Citi.” sentence you made. You lost us on that.

Regardless, thanks for the question and hopefully Kelly or another mortgage broker or possibly some bankers will come in with some answers.

Still confused about Conforming Loan Limits?

3 Oceans Real Estate provides some answers:

Raising the conforming loan limit has the following benefits:

1. It does in fact greatly stimulate the economy

2. Many consumers who got in over their head will now be able to afford their mortgage

3. Greater affordability for housing is created

4. It will influence a portion of the jumbo market that has been lost and create some investor confidence, and finally

5. California has been long overdue to have a raise to the conforming limit given that over 50% of the nation’s jumbo mortgages were originated in California.

Okay, let’s say that raising the conforming loan limit is good for a moment. What’s next and what are the details? There’s still some speculation, but here goes:

1. The conforming loan amount will be determined based on 125% of the median price of a given county…

2. This allowance will NOT go into effect for purchase or refinance transactions until July 1, 2008 (that’s the earliest date that the loan application may be signed) since the market needs from now to June 30, 2008 to liquidate current qualifying mortgages available for sale from institutions

3. The types of programs allowed will be fixed-rate programs on a full-doc basis, which means that the hybrid, interest-only programs using “stated” income will not be allowed

4. The property must be single-family and owner occupied, which means that 2nd homes, investment properties and multi-unit properties are ineligible

5. Credit scores must be “reasonable” with a combined loan-to-value not to exceed 90%

6. No cash-out, which means that a refinance may not allow the borrower to receive any greater than $2,000 at closing

7. Loans must be funded and closed prior to December 31, 2008

Please visit their site for more on the matter, or feel free to ask our very own Kelly McCray.

-How stimulating will raising the conforming loan limit be? [3 Oceans Real Estate]

Bush signs higher conforming loan limits into law

by Kelly McCray

H.R. 5140, the economic stimulus plan, was signed into law by President Bush, among other things; the bill raises conforming loan limits for the Bay Area. The Bay Area for years has had no help, we pay premiums for our real estate, and we have, for so long, been subject to the AMT (alternate minimum tax) and the scorn of the rest of the country that we deserved it. Finally, Speaker Pelosi was able to broker something that will really give us some relief.

Conforming loan limit for Bay Area, yesterday – $417,000

Conforming loan limit for Bay Area in 30 days – $729,750

Coincidently, today was CAMB (California Association of Mortgage Brokers), SF Peninsula Chapter’s trade show. I went to mingle with people who I hoped would be able to shed some light on what this really means, turns out it is just too soon to know. But we are working hard on it.

Why does it matter? After all the loan approval process is complete and it’s time to have money at escrow, let’s just say it comes from a lender. The lender has sent money to the title company, usually from a line of credit that the lender holds, the lender wants that money back as soon as possible by selling the loan on Wall Street, so they can pay back the line of credit and then fund more loans. Fannie Mae and Freddie Mac are the middle people, their job is to buy the loans from the lender and then THEY sell it on Wall Street as a mortgage backed security. If they can’t sell it, tough, they (Fannie & Freddie) have to hold it.

Until today, with some exceptions, the loan limits that Fannie Mae and Freddie Mac were restricted to were $417,000 for the Bay Area as well as Detroit. So, if the lender made a loan yesterday for $600,000 and couldn’t sell it on Wall Street, today they could count on Fannie to buy it. See, now they want to make more loans for the higher loan limits. With this new legislation, Fannie Mae and Freddie Mac will be able to increase that loan limit in high cost areas like the Bay Area to $729,750. So, the lender who makes loans up to $729,750 can do so knowing that Fannie will buy it. They don’t have the risk of having the big loan sitting on their books.

What should happen is that loans up to $729,750 will be able to step into the shoes and types of loans that the little loans were in yesterday. Which means:

  • 3% down payments, Fannie Mae loans allow for lower down payments
  • an automated underwriting system that has a formula that looks at the entire borrower profile – this computer program takes all information, a persons depth of credit, time in their career, amount of assets and produces an approval. The way we are currently doing jumbos is that there is a list of guidelines – i.e. 6 months reserves, a FICO score of 720, two years in their line of work. Without one of those we can’t get an approval, with the automated underwriting we might, because the program takes into consideration that one item might be strong enough to compensate for a weaker item.
  • The lower loan amounts were enjoying rates that are hovering around the high 5%’s today for 30 year fixed, the bigger loans are in the high 6%’s.

For my beloved Bay Area homeowners this could be great relief. But the industry just doesn’t know what to expect. This will become clearer in the coming days.

What should you do? Check back to this site soon and we will have more information.




[Update: Kelly just updated us, and we posted it here in the comments. She's pretty good about responding in the comments, so if you have questions don't be shy.]

Confused about the conforming loan limit increase? You’re not alone.

We’ve received a lot of emails regarding both the amount of the conforming loan limit increase ($729,750 max), and the time this increase will be effective (July 31st 2007 to Dec 31st of 2008). So if you’re confused, you’re not alone.

Kelly McCray provides the following:

“The information coming out on this issue is confusing right now. The bill itself is not written well and the industry is buzzing with conflicting interpretations.

1. The HUD median home price for San Francisco is 650,000, the new law sets the conforming limit for us at 125% of that, but not higher than 730K, (principal loan amount) so we will be able to go to the limits.

2. The time frame (and this is the confusing part) is that the GSE’s can buy loans that originated from July 2007 through December 2008. So, if we closed deals in the last 7 months that could benefit from this development, we could refinance them. What I don’t know is if I can refinance a previously jumbo loan into a conforming loan if I closed in January 2007, this doesn’t make sense.

3. There may be some hits for higher loan amounts, but this will have to be worked out and there aren’t any answers yet. Today, a conforming loan of $417K, 30 year fixed is 5.5, if they hit us with a .5 adjustment for loan amount then that makes the rate 6%, this is almost a full point lower than the current jumbos.

4. There is no answer as to how long this will take to implement and get out to the lenders, I can’t even guess.

If buyers are hesitant about the deals they are making now, if they close thinking they can refinance when this gets sorted out, the requirement for holding title on a refinance is at least six months, they would have to wait until August counting forward from March.”

-this just in: Conforming Loan Limit approved by Senate [theFrontSteps]