A Front Steps request — can we get some lender input?

What does this latest round of failure and acquisition do to the mortgage market? We keep hearing the same refrain. Basically (to paraphrase), “Interest rates will likely get lower short term. But conversely credit will be even more difficult to obtain.”

To put a fine point on it, what does this mean to the average buyers with 20% to put down on a house? Or, can you describe a typical scenario right now? Something that has come across your desks?

Any and all input would be greatly appreciated.

20 thoughts on “A Front Steps request — can we get some lender input?

  1. Rates have dropped dramatically for conforming loans (up to $729K until year-end) due to the Fed takeover of FNMA, but we haven’t seen much relief for jumbos. Buyers with 20% down and documented income should have no problem getting financing. The tougher financing restrictions are for buyers who want to put less than 20% down, or who have credit or income issues. That could make it a bit tricky for the $1 million price range, where you could previously get in with only $50,000 (or nothing) down and still get attractive rates. Now that scenario would require $200,000 down, or you’d probably see punishing rates on any portion above 80%.

  2. Martha & Paco are right.

    In general, the financial system is de-leveraging, so high-LTV is out. Debt should also get more expensive, but the US Government is subsidizing it as *their* debt is still cheap (the Central Bank of China is still buying US Treasuries — which is great because no one else is).

    Also, as house prices continue to have downside risk, lenders don’t want to make high-LTV loans as their default rates spike if the borrower becomes upside down on them.

    Rentals need to be cash-flow-positive, as appreciation is not going to make up for losses going forward.

    Banks are short on capital, so they are looking for borrowers who have plenty of real income, great credit, and very large downpayments.

  3. As I have stated before in my posts, the importance of getting approved with a bank is the key to the future of homebuying. All points taken, but I seem to disagree with most of the aforementioned. Number one, the bailout of Fannie Mae and Freddie Mac had a very short term affect on helping to decrease interest rates. On the other hand, the AIG bailout has now forced them back up, and higher, to the level before the government takeovers of the GSE’s. Secondly, non owner occupied properties are now typically priced with a 175 to 375 basis point spread, the lower the loan to value carries the 175, to help protect the banks from future losses.

    We are in a full doc, 20% down world which does not always help the San Francisco market. . .especially, as, stated and creative loans were designed specifically for the borrower that SF and the Bay has always attracted.

    A few rules to be noted; which will soon become universal, there detriment to the market, and thoughts:

    1. If a borrower occupies a home and plans to rent it out; expect the lender to require a certain degree of equity (30-40%), and verifiable rent deposits and executed leases. . .all of the documentation for the loan.

    2. Also, banks are more concerned with cash flow(non owner occupied) than ever before, expect to get a rental survey to verify rental amount; which we all know is increasing due to housing crisis.

    3. Expect rates to change quickly and dramatically. . .be prepared with an application completed, all documents prepared for submission.

    4. Mortgage Brokers will continue to see the lenders/vendors lose money, service, and steam. A good chunk of A paper losses have yet to be realized. We will see another wave of lender fold ups.

    5. San Francisco’s New Construction; expect to see presale requirements. Expect to see conversion to rentals, and expect existing condo projects to increase in value.

    6. Expect spreads to widen. Banks will cushion all mortgage loans with higher interest rates because of the past performance.

    7. FHA, this will be the next subprime.

    8. We will see a recovery.

  4. To expand on what Paco said, non-owner-occupied units will probably require 30-40% down, in addition to the rental cash flow to cover the payments.

  5. “To expand on what Paco said, non-owner-occupied units will probably require 30-40% down, in addition to the rental cash flow to cover the payments.”

    Even if the rents put it comfortably in the black, month to month?

  6. hi ken:

    i don’t know where a rental is cash flow positive in the Peninsula or SF, where prices still outstrip rents by historic amounts.

    are you thinking East Bay?


  7. Most secondary market programs only allow 80% financing for loans up to $650,000, 70% financing for loans up to $800,000, and 60-65% for dollar amounts over that. Lenders still want the buyers to have substantial equity, even if it’s positive cash flow.

  8. I didn’t make this clear, but in my previous post I was referring only to LTV’s for non-owner occupied property. For owner-occupied, it’s higher.

  9. zanon,

    I have actually noticed a few cash flow positive properties of late. Unfortunately, these stringent lending standards might put them out of reach. Jeez. Twenty-five percent is not significant skin in the game on a cash flow positive property?

  10. Ken:

    Where are these cash flow positive properties? East Bay? I certainly have not seen any in the Peninsula or in SF.

    And 25% sounds OK to me, but I don’t make the rules.


  11. I have never in my career seen a property in SF that cash flows with 25% down. Never. If you find one, I’d be happy to let about 4-5 of my clients know. Most apartment bldg investors in SF aren’t focused on cash flow, rather appreciation. Usually it takes 50-60% down to make cash flow on property in SF, because of the high sales price and low rents. Usually.

  12. He knows about them because he is taking me to them. But, if we pass because of some other things I have cooking then der fluj will pass it on I’m sure. I will know by tomorrow afternoon if plans A or B come through.

  13. I was actually slightly dissapointed with my brokers refi options.

    We currently pay 6.5% on a 2 unit building (we live in one of the units).

    have around 30-35% down. Paid .125% worth of points to get this rate. Its a 10 year i/only.

    Now the best offered with no points is 6.375%, 5yr i/only. Paying 8k or so gets around 6%. But of course my biggest concern is losing the bigger fixed rate period. have rates really only come down by only that much (effectively 6.5+.125 then as opposed to 6.375 now -so 0.25%) or do you think its possible to get more by shopping around?

    Its a jumbo loan by the way, which probably isnt helping,

  14. do your math (18:40:14) :

    Jumbo loans have taken a turn for the worse. 6.5 on a 2 unit locked for ten years. keep it. you may never see rates that low without cost, at least now for the jumbo product. This is no longer about the bond, this is about credit spreads. what we all once knew, or know, through it out the window. fasten your seat belts folks, this is going to be an interesting weekend.

  15. TheFrontSteps: Amen. That’s why I asked Ken where these cash flow positive properties were, because they aren’t anywhere I live. I don’t think you’d get cash flow positive in my area even with 50%-60%. Prices are high, rents are low, and appreciation is the name of the game!

    I think the only reason banks are getting picky about higher downpayments is because they don’t think properties are going to quadruple between 2008-2018.

  16. “5. San Francisco’s New Construction; expect to see presale requirements. Expect to see conversion to rentals, and expect existing condo projects to increase in value.”

    The Banker,

    In terms of the presale requirements, do you mean a certain number of presales before construction will even commence? Also, do you really expect that many condo conversions to rentals such that existing condos will actually increase in value … presumably based on more constrained supply? If so, it’s an interesting viewpoint that I haven’t heard before. Thanks

  17. The presale requirement is based off of a fannie mae/freddie mac rule. The rule defined is, in order for any loans to close in a particular project, a certain amount of contracts need to be written with deposits, to bona fide buyers. These presale numbers range from 51-70%. This means that if a project has only sold 43% of its’ units, no lender can lend in it. This tyoe of restriction can be ignored with a banking relationship, or a very strong credit profile. . .but this will hinder the velocity of sales and the ability to sell at the pace that the supply has been built. Look at it this way, sure SF has remained value stable. . .but there is a construction loan that the builder needs to make good on, and they do this in increments. If the lender comes knocking. . .you pay up. Look at Lehman, Cwide, Bear Stearns. Credit is dry. If the builder can build the project, carry the loan and sell at a snails pace, then they are safe. Other than the select few. . .there are 2 choices—rent them, or auction. A prediction perhaps.

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