In 2008, as a response to the collapse of the mortgage market, federal regulators created a new category of mortgage, the high-balance conforming loan.  Since that time, loans have been available up to $729,750 in high-cost areas at rates lower than those for full “Jumbo” mortgages.

Conforming loans are those that have a loan balance under $417,000 which can be re-sold by an originating lender on the Fannie Mae and Freddie Mac federally sponsored mortgage markets. This allows the lender to re-lend the same funds over and over again and is important to the liquidity of the lending market.  The high balance conforming limits applies to mortgages between $417,001 and $729,750.  This program was created to support the economy by assisting high-balance borrowers during the financial crisis and was temporary.

Starting October 1, 2011, the high balance conforming loan limit will drop to $625,500.  This in turn means that interest rates on these loan amounts between $625,500 and $729,750 will be HIGHER starting October 1, since they will no longer be backed by the government. After October 1, any mortgage over $625,500 will officially be a “Jumbo.”

 Interest rates this week are among the lowest we’ve seen in 2011 and it is not expected that the federal government will extend the high balance conforming loans up to the $729,750 level again in the near future.  Fixed rate loans have seen the largest drop and are currently the lowest interest rates we have had in the past 40 years.

 If you are planning a purchase or refinance and you will need a loan amount between $625,500 and $729,750 you should get the process started immediately.

 Eric can be reached at eric@svcfunding.com  and 408-268-2442, and has been helping people finance their homes since 1987.

If you are in the position to upgrade your home or investment property, it can be a great choice to sell a lower value property at a loss and obtain a more valuable property.  This is called trading up in a down market and it makes sense because x% off a lower price is less than x% off a bigger price.  But for those who are faced with the need to simply exit the market entirely due to job change, job loss, divorce, a mortgage they can’t pay or neighbors they can’t live with, the market being down does not have the same silver lining.

If you have the cash to bring in, the process is the same as a straight-forward, normal sale, albeit more painful.  In some cases, you can even write the loss off your taxes.  If you don’t have the cash, though, you will need lender approval and a good explanation of hardship to get the short payoff approved by the lender.  The forgiven debt is considered potentially taxable income by the state and federal governments.  The good news is that under the Mortgage Debt Relief Act of 2007, the Feds are not collecting taxes on mortgage debt forgiven in 2007 through 2012 up to $2 million for a couple filing jointly and that under the Conformity Act of 2010, California is doing the same for debt forgiven up to $500,000, with partial tax relief up to $800,000 of debt forgiven.  Especially with San Francisco’s fairly low value declines, these exclusions will protect most people needing to sell their homes short in our market.

In approving a short sale, the lender can either forgive the debts or reserve the right to recover the monies at a later time.  The lender’s decision-making on this will be driven by the level of hardship the borrower is experiencing and whether the loans were recourse or non-recourse at the time of borrowing.  Loans used for original purchase are generally non-recourse, meaning that the property itself is the only security for them.  Many other loans, especially those that were called “home equity lines of credit,” obtained through refinancing may have recourse to the borrower personally.  This has not been a factor in the short sales I have done since 2007, and SB931 passed in August 2010 has converted all 1st mortgages in California to non-recourse even if they were the result of a refinance, but it does sometimes come up.  It’s important in this case for the borrower/seller to be very clear on whether the debt is being forgiven entirely or not and to get legal advice regarding this issue before finalizing a short sale.

The first steps are in deciding whether to list your home for sale as a short sale are to 1) talk to your Realtor about whether your value really is short based on recent comparable sales, 2) talk to your legal and tax advisors about all the potential consequences; and 3) determine if you have a hardship likely to be approved by the lender.  Examples of acceptable hardships are reduced income, increased expenses, relocation, marital difficulties, death and combinations thereof.  People who just don’t want to pay the mortgage because their house is “underwater,” may not make the grade.  If you have a home you can live in and you can afford the payments, you are not a good candidate for a short sale even if your home’s value is lower than the mortgage balance.

Once you have decided to sell your home short, it pays to list with a Realtor who is experienced in them and has a good track record of closing their short sales.  I recommend to my clients that they market the home as if it were a regular sale in terms of presentation and quality of marketing and that they do a full marketing period so that they can show the bank they really tried to maximize the value.  I have found that this works and also results in having a buyer in contract motivated enough to follow the process all the way through.  This is no small issue as it is taking a minimum of 90 days and as long as eight or nine months for some short sales to close.

I tell my clients that they can either pay with money or aggravation and time.  Many people – especially buyers – think they want to pay with aggravation and time, but about half way through they’re no longer sure!  No matter how good your Realtor, getting a short sale closed is rarely hassle free.  There can be stressful negotiations with the banks right up to the end about the terms and who is going to pay exactly what, but success can be achieved through the careful blending of patience, tenacity and information.

Even though it’s been reported that in San Francisco specifically and the bay area in general that prices are leveling off, the disposition of so called “toxic assets,” will go on for some time to come.  I’m not going to attempt in a 600 word article to tell you how to buy a distressed property, but I think that starting with some terminology would probably help most of us to do what many like to do best – talk about real estate.

Let’s start with a “foreclosure.”  I hear people talking about buying a “foreclosure,” all the time.  There are three ways to do this:  Trustee’s sale, public auction and buying an “REO” through the regular sales process.

Trustee’s Sale:  To get into defining these types of sales, it’s necessary to step back a bit and talk about the process of foreclosure.  In California, we use a form of securing debt called a “Promissory Note” and “Deed of Trust.”  The word “Mortgage” is slang we use to describe the other two things.  Mortgages are a legal instrument not used in California so I’m not going to get into how it’s different.  The Promissory Note defines the terms of the loan and the Deed of Trust is recorded at the county courthouse in favor of the lender (or “Trustee”) against the property.  When someone has failed to make a number of payments, the Trustee can then record what’s called a “Notice of Default,” which starts a 180 day clock ticking for a Trustee’s sale.  Trustee’s sales are publically noticed and anyone can technically buy the property.  At this sale, the Trustee auctions off the property, for cash.  Sometimes individual investors buy the property but often the Trustee ends up buying it themselves at which point it becomes an “REO.”

Buying property at a Trustee’s sale is a tricky business and should not be attempted by anyone who is not a professional investor.  The biggest problem is that there is no protection assuring the buyer that they are the real owner of the property.  Understanding exactly what this means and learning to do the research to protect oneself is a full time job.  They are also only sold for cash, which is another huge obstacle to most people.  Which takes us to the next type of Foreclosure, the “REO.”

REO is an acronym that stands for “Real Estate Owned,” and these properties are usually owned by an institution that would prefer not to own them.  Most REO properties are sold just under market value and are listed by Realtors for sale through the regular Multiple Listing Service.  When you see property listed for sale as a “REO,” then, you know it’s owned by an institution and that it has been foreclosed.

When an REO property has failed to sell through the regular sales process, it may be auctioned off by one of several large organizations, such as REDC.  You can see their listings at www.auction.com.  Properties sold at these auctions are sold with Title Insurance, which protects the buyer against other claims against the property and ensures that at the end of the process the buyer is really owns the property.  Many properties sold at these auctions can also be financed.

Now for the concept of being “underwater.”  This means that the property is worth less than the total of the debt owed.  As has been widely reported, people who are underwater on their homes are not as motivated to keep paying the mortgage as those who have equity in them.  Makes sense.  A person who is underwater may try to get their lender to modify the terms of the mortgage by reducing the amount owed, reducing the interest rate, or both.  Another remedy available to people who are underwater is a “Short Sale.”

Short Sales are listed by Realtors and advertised in the Multiple Listing Service.  They are listed this way when the amount of expected sale falls “short” of the amount of debt on the property.  After an offer is received, which in effect proves the value of the property, an application is made to the lender(s) to request that they, essentially, forgive the short fall.  This request may be countered, granted or denied.  Getting a decision can take as long as three, six or even nine months; sometimes a lot less – you just never know.  The effects on the person selling the property are not generally as dire as when the property is foreclosed, and this is the main reason people attempt to do it.  In some cases, the debt is simply forgiven, and in others, the person selling may be asked to sign a promissory note for the difference.  Anyone attempting a short sale should seek the advice of a real estate attorney before making any decisions.  Because of the complexity and uncertainty involved in the process, these properties mostly sell below market value and can be a good deal for buyers who are willing to wait it out.

The above is a really general overview.  These can be exciting times if you’re in a position to buy and really hard ones if you are on the other end of one of these situations.  In either case, contacting a Realtor is a great place to start figuring it all out.

The main point of the article is that foreclosure sales are surging in even the better neighborhoods of the city, and bad times are coming but the figures and examples cited just don’t add up.

Here’s a sample quote from the article:

“Still, more people are falling behind on their mortgage payments. Some 1,885 San Francisco households received notices of default, the first step in the foreclosure process, in 2010, DataQuick said. That was down from 2009′s record number, but still more than double the historic average.”

How exactly does a reduction from 2009 = “more people falling behind”? Also, one should note that a notice of default does not necessarily imply a forthcoming foreclosure. It means someone was late paying their mortgage.

Another article quote:

“In San Francisco, the 709 foreclosures represented just 0.052 percent of all households, DataQuick said, while in Contra Costa the foreclosure rate was 2.3 percent. In the nine-county Bay Area, 1.78 percent of all households went through bank repossession in 2010.”

Here’s a salient point of the whole article: the SF foreclosure rate is 70% below the 9-county Bay Area rate. And if you broke off the northern part of the city, it would probably be 88-90 % below the Bay Area rate.

The article makes a lot of comparisons of 2010 with 2007, but we all know the market went through a wrenching change in autumn 2008. The issue isn’t where the market went from its peak, but where it is now, and 2010 unit sales were above those of 2009, and median prices have now been stable for 7 quarters (21 months). Market activity since September 2010 has been quite strong and it appears that national economic conditions are improving.

Here are some statistics from MLS pulled this week:

Out of 465 Active house listings, only 40 are REOs, of which 24 (60%) are in districts 3 & 10 (Bayview to Oceanside). Only 2 are in district 5 (Noe/ Castro/ Haight), and zero are in District 7 (Pacific Heights/ Marina). Those waiting for an upcoming deluge of bank-owned houses in the better neighborhoods of the city (and a downward spiral of prices) are probably waiting in vain.

The number of REO sold houses in 2010 in SF was 291 (out of 2309 sales) down from 309 sales in 2009. Of the 291 REO house sales in 2010, 216 (74%) were in districts 3 & 10. In district 7, there were 3 REO houses sold in 2010, less than 1 per quarter.

Out of 721 Active condo/TIC listings, only 41 (5.7%) are REOs, of which 15 are in district 9 (SOMA/ South Beach), 6 are in district 5, and 1 is in district 7.

The number of REO condos sold in 2010 did go up as a percentage of total sales, coming in at 7.7% of sales up from 5.6% of sales in 2009. But still a relatively small percentage of total sales.

Of the 239 condos and TICs sold district 7 in 2010, only 10 (4%) were REO sales.

REO sales have had and will continue to have an effect on the SF home market, but none of these stats from MLS suggest that foreclosure sales in the better neighborhoods of San Francisco in 2011 will have a significant downward effect on current values.

For starters, Trulia has designated SF the #1 of best American cities to invest in real estate in 2011.  That means that if you’re holding property here, or planning to buy, you are on the right track for the long term.  Being on this list means that our overall outlook is good for us on jobs and other things – not just that values haven’t fallen as much as in some other places.  To see the article click here.  If you want to check in on how you’re doing, please call me any time for a market analysis update on your properties.  It’s possible that your specific situation would be improved by trading up, acquiring another property or even selling right now.  I’m happy to weigh in and provide the information that will help you make good decisions when you’re wondering.

For those who can’t resist a little schadenfreude, the list of the worst places to invest in 2011, can be found here.  (WARNING:  if you are on vacation and real estate seems too cheap to be true in one of these worst places (or anywhere else), be careful!  The fundamentals of the community will ultimately drive real estate prices in to the future and what it means to be on this list is that the fundamentals are not strong.)

As far as my own business, I have much to be thankful for as well.  2010 was another challenging but successful year solving real estate problems brought to be in large part by YOU – my wonderful Clients In the Know!  I can never thank those of you enough who consistently remember that I’m here to help you and yours with real estate and related issues.  I really appreciate your faith and trust and I look forward to the next set of challenges I’m sure you’ll be bringing me in 2011!

High balance through September 2011.  This is wonderful news as it will allow refinances of loans in San Francisco County up to $729k to be federally backed through that date.  It also allows buyers to use FHA loans with as little as 3.5% down up to that amount – even for refinances.

To see the press release from the Federal Housing Finance Agency, please click here.

Susan is an expert on all loans government backed (and lots else besides).  If you want to reach Susan, click here.

Below is a chart that shows closed sales.  The highest number of closed home sales for 2010 so far was in March.  This is unusual, but will make sense as we analyze other sales data, below.

Closed Home Sales Over 1.5 MM in SF over the past 25 Months:

Unlike the market for all home sales in San Francisco, for which ratifications peaked early in April in 2010, the luxury home market peaked at a more traditional time, in May.  The chart below shows the luxury home market that was perhaps affected INVERSELY by the government tax credits – it’s possible attention was focused on properties for which the tax credits were available.  We also see that ratifications in June and July remained relatively strong.

Accepted Offers on SF Homes over $1.5MM over the past 25 Months:

Our final measure is the months supply of inventory which is generally used to show whether it is a buyers’ market or a sellers’ market.  The market earlier in the year was a definite buyers’ market, but with the glut of ratifications in February that ate up the sitting inventory from Fall 2009, the late spring and summer market turned an advantage towards sellers.  Looking at luxury home sales over the past six months, the main factor seems to be pricing.  There were 196 homes sold in San Francisco over $1.5MM in the last six months and 144 homes either expired or were withdrawn.  Of those that sold, 80 sold over their original asking price at an average of 105.33% in an average of 24.35 days on the market.  The remaining 116 sold homes were reduced on average about 10% before receiving an offer and sold for 92.04% of their original asking price after an average of 78 days on the market.

As always in San Francisco, pricing is king and these numbers prove again s to go you that just because a seller “wants” or “needs” a price, buyers won’t move until they are perceived as a value – and then they rush to outbid each other.

The large number of listings withdrawn or expired without selling combined with low short and REO sales volume tells us that a large percentage of sellers over $1.5MM are attempting to delay until the market brings them the price they want.  After 2 years of waiting, I wonder if luxury sellers will finally be ready to sell at the prices the market will bear … It will be interesting to see what the fall brings.

Months Supply of Inventory:  SF Homes over $1.5MM over the past 25 Months:

But with statistics, context is everything, and these articles show a fundamental lack of understanding of current context and are misleading regarding what’s going on in San Francisco (which is, after all, the best place on earth).

The first chart below is of the last 2 years’ home sales in SF. July 2010 is indeed well below May 2010, as well as well below July 09 and July 08. However, this is almost completely a function of the fact that deals that would have naturally and typically accepted offers (ratified) in May 2010 were rushed into April so as to meet the Federal Tax Credit deadline. Because of that crush of April ratifications, closed sales in May and June soared way over the sales rate of past years, AND May ratifications this year were much lower than normal. Typically May is one of the highest ratification months of the year; low May ratifications translated to lower July closings. Typically, July is one of the highest closed sales months because of the high May ratifications. With the unusual events this year, the numbers were thrown off – which created the dramatic percentage declines everyone is chattering on about.

Remember: closed sales are 30 – 60 days behind the market (the time of offers being accepted). To get a sense of current market activity, one looks at ratifications, as in the second chart below.

In the third chart below, the Months’ Supply of Inventory for SF  houses and condos is shown over the past 2 years. MSI, at a moderately low 3.8 months of inventory, hasn’t budged in three months – again one can see the effect of the April tax credit rush on the chart — and it is almost exactly the same as in July 08 and July 09.  (The lower the MSI, the hotter the market.)

Closed Home Sales in SF over the past 25 Months:

Below, we see the huge surge of ratifications in April which (stealing normal early May ratifications) led to the large decline in May. Thus May’s number of accepted offers is below past years. But June 2010 ratifications are above last year’s. And July’s ratifications are above July 2009 and July 2008. That is not an indication of a collapsing market. Yes, the market surged in April due to the expiring tax credit, but except for the initial effect on May ratifications (and the resulting effect on July closings), the expiring tax credit hasn’t affected June and July ratifications at all.

Accepted Offers on SF Homes over the past 25 Months:

Since the SF home market started recovering in spring 2009 from the “crash” of autumn 2008, Months’ Supply of Inventory has been very stable, delineating a relatively stable market, running typically between 3 to 4 months of inventory. This is generally considered a moderately low MSI, signifying a relatively strong and consistent buyer demand. Again, it is unchanged for three months, and almost identical to the MSI recorded one year ago and two years ago.

Months’ Supply of Inventory: San Francisco Houses & Condos

None of this is to say that the market might not change tomorrow. It is to say that the most recent statistics don’t currently indicate any dramatic change in market conditions in San Francisco.



It’s nice to be noticed! My thanks to Mission Local editor Lydia Chavez and which ever Client In The Know passed my newsletter on to her!