The Housing Chronicles Blog: Good credit may not be enough in "distressed" counties

Friday, March 21, 2008

Good credit may not be enough in "distressed" counties

Given the mortgage insurers' recent lending restrictions throughout California, good credit may not be enough for borrowers without a sufficient down payment or those looking to buy investment property or second homes. While that could push many buyers into the arms of the FHA, that program also has its own restrictions, and condo projects generally must be pre-approved by the agency.

First, from a story in the Daily Breeze:

Just when consumers and the U.S. economy need banks to lend more freely, the mortgage industry is making it harder to borrow - even for those with good credit.

In recent weeks, mortgage insurers, whose backing is required for borrowers who can't afford the traditional 20 percent down payment on a home, have already flagged nearly a quarter of the nation's ZIP codes where they refuse to insure some home loans.

That's more than 9,600 ZIP codes in at least 34 states where they won't insure certain types of home loans - those for investment properties or second homes, those with riskier adjustable-rate or interest-only mortgages, or for buyers making small down payments such as 3 percent.

Many mortgage insurers include the South Bay and much of California in a category known as "distressed market," where home values are expected to drop...

The reluctance to extend credit comes despite a flurry of government initiatives, including steady interest rate cuts by the Federal Reserve, intended to make it easier for would-be borrowers and those facing interest-rate resets on their mortgages.

The growing reluctance of lenders threatens to dampen sellers' already soggy prospects for the spring home-buying season - and that means more pain for the already battered housing sector and the broader economy.

The new restrictions will "severely limit the potential pool of buyers," whether the buyer plans to live in the home or rent it out, said Patrick Duffy, principal at MetroIntelligence Real Estate Advisors, a Los Angeles consulting firm.

"It could delay the rebound in the market," Duffy said. "It's going to force people to take longer to save up for the down payment."

While the South Bay will be affected by the reduced availability of mortgages, the area remains "a very popular area with a very high median income." That reality could insulate the South Bay from the worst effects of the tightening lending standards, Duffy said.

With banks and mortgage insurers pulling back, state and federal programs for first-time homebuyers and people with poor credit are attempting to fill the void.

"This is a great way to throw loans in the arms of the federal government," Duffy said. "FHA offers loans with only 3 percent down, and they just increased limits."...

Home buyers are adjusting to the new reality, Realtor Adolph James said.

"One of the things I've noticed is most of the people interested in purchasing property in the South Bay are bringing more money than they had in the past," said James, of Shorewood Realtors in Manhattan Beach.

"You're seeing fewer people coming with only 5 percent or 10 percent (as a down payment). The psyche is you can't come in with a shoestring because that's how people got in trouble."

Inland areas such as Harbor Gateway, which generally attract first-time homebuyers, are likely to feel the pain from the credit crunch more so than the beach cities, James said.

"That's where this stuff started and that's probably where it's going to end," James said. "You're going to see a few defaults in the beach areas, but nothing like what you're going to see in the entry-level areas."

Next, for an excellent overview of the pros and cons of FHA loans (as well as other timely posts), here's a summary from the SFVRealEstate blog, which is authored by Broker Associate Judy Graff and covers local and national topics for L.A.'s San Fernando Valley:

New FHA Loans: What You Need to Know

  • New FHA restrictions just came out. Here’s the upside.
  • The loan limits for SFR in L.A. are $729,750 (same as “jumbo conforming”).
  • Loan limits for 2 units are $934,200.
  • The interest rate is 6% as of this writing; however, there is mortgage insurance (see below).
  • Minimum down payment is 3% (not including closing costs).
  • Fixed rate and Adjustable rate programs are available.
  • Must be full documentation loan. No stated income loans.
  • No buyer reserve requirement (this is also huge).
  • No income limits.
  • The seller can contribute up to 6%, including closing costs, although the seller does not have to pay the closing costs.
  • There can be non-occupant co-signers on the loan.
  • You do not have to be a first-time buyer.
  • Gifts are permitted for the entire 3% borrower investment and don’t need to be “seasoned.”
  • Gifts are also permitted for all closing costs & pre-paid items.
  • Down payment assistance programs are permitted, such as city first-time buyer housing programs.

Now, here’s the downside:

  • There is mortgage insurance. It equals either 0.5% point per month, or 1.5% points up front. The up-front payment is deductible from your taxes during the year that you buy.
  • There are stricter appraisal requirements:
  • Any operable or useful element in the subject property must have at least 2 or more years of useful life or it must be replaced.
  • The appraiser must be FHA-approved.
  • The appraiser can require a separate inspection upon any “visible” defect or if he/she has knowledge of any existing problem.
  • The property must be structurally sound.
  • It must have a useable garage.
  • The property cannot have code violations.
  • Each living unit much contain domestic hot water, sanitary facilities and a safe method of sewage disposal. Connection to public systems is required if available.
  • Heating systems must be adequate for healthful and comfortable living conditions.
  • Condo projects must be pre-approved; they can be spot-approved but this is much more difficult.
  • Condo projects must have sufficient reserve funds.

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