Who runs Buyer Town? What will happen when the conforming limit drops?

Jul 19th, 2011  
by IrvineRenter  in Library News

Astute Observations

Astute Observation by winstongator
2011-07-19 04:08 AM

I was going to disagree with the idea that lowering conforming loan levels would have a minimal impact, but if households with $120k total income are really buying $920k homes, then I have no idea what will happen.  That is a 50% DTI.  I don’t think those happen in my part of NC. 

A home I was following got sold for about $900k.  It had a jumbo with 20% down.  Same bank, different home, with a conforming first and large 2nd to get to a total loan value around $700k.  Smaller local bank.  Bigger local bank also doing similar.  However, I don’t think DTIs are anywhere close to 50%.  Closer to 15% than 45%.

It boils down to how close people are running to the absolute maximum underwriting limits.  If an area is flat-out maxed, a small change (as I view the conforming limit & 0.5% jumbo premium) can have a big impact.  If you’re talking about going from a 22% vs 20% DTI I don’t see much of an impact.

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Astute Observation by Perspective
2011-07-19 09:01 AM

I choked when I read that too - the $120K income to finance a $920K mortgage!

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Astute Observation by HydroCabron
2011-07-19 10:37 AM

There were discussions around 2006 of Bay Area buyers with $100K household incomes purchasing million-dollar homes. For me, that was the height of the sickness.

My household is currently doing much better than this, and I won’t bother with anything above $450K.

(Actually, I won’t bother with anything anyway, because sellers are still hallucinating, and I refuse to play ball in light of coming price declines and no certainty that my household income will remain as good as it is.)

I watch $500K sales happen around here for half-duplexes in shitty neighborhoods, and I wonder how many idiots are left in the buyer pool.

There has to be the return of some sort of laugh-out-loud threshold at about $500K. In light of median household incomes in most places, $500K is an outrageous price for an asset which will eventually rot and fall over.

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Astute Observation by newbie2008
2011-07-19 10:53 AM

In 2004, I looked at $1.1 million property in Palo Alto.  4000 sf lot on busy street.  Property was “Red Tagged” and lender will willing to finance me at 50% DsTI (debt service).  It would of taken at least $50,000 to make it habitable (but not to city codes)—likely a tear down.  Guess people are willing to pay for a good school.  I decided to rent a 2600sf at $2500 across the Bay.

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Astute Observation by Chris
2011-07-19 10:05 PM

If that was University or Embarcadero, you should have bought it regardless of whether it was a tear down or not with that price. That area currently can fetch around $2 mill for a really crappy place if I’m not mistaken.

You can thank Zuckerberg, Brin, Page, etc for that.

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Astute Observation by Swiller
2011-07-19 02:24 PM

Household incomes do great…until divorce. Can’t always count the chickens from the eggs, about 60-70% of household incomes suffer from divorce.

Good luck.

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Astute Observation by lee in irvine
2011-07-19 10:51 AM

That’s what cheap money did to our economy.

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Astute Observation by SantaAnaRenter
2011-07-19 06:46 AM

IR and SGIP both outline the true impact beyond just the lower loan limit:

When the agencies leave this space, it will be filled by private lenders (several programs are already up and running), but with much higher down payment requirements; higher FICOs; lower DTIs; vastly higher reserves required; etc.

Plus additional (stricter) rules regarding employment, occupancy, listing history, etc.

THE INTERESTING PART TO ME… this is what it will look like when they get around to dissolving Fannie/Freddie altogether. Clearly private lenders are no as generous (stupid) as the current government sponsored lenders!

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Astute Observation by screwedbyanelephant
2011-07-19 10:43 AM

“Clearly private lenders are no as generous (stupid) as the current government sponsored lenders!”

where you hiding in a cave from 2003-2008?  (bear, merrill, wamu, wachovia, indymac, lehman…)

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Astute Observation by wheresthebeef
2011-07-19 10:59 AM

That was back then, the rules of the game have changed in a big way.  Many of those banks no longer exist today, the ones that do are fighting for their lives trying to stay solvent (or use use fuzzy math to prove solvency).  They got their one time get out of jail free card, I seriously doubt there will be another one.  The politicians know that the general public will not tolerate another huge round of bank bailouts.

So yes, private lenders will be very picky and choosey of who they lend to from now on!

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Astute Observation by newbie2008
2011-07-19 11:00 AM

Those banks with WS repackaged the loans and sold them off as safe investment.  Another box of chocolates that reeked and was not cocoa based.

Those banks were corporations and not owned by those in-charge.  It’s having the foxes running and guarding the hen houses.

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Astute Observation by screwedbyanelephant
2011-07-19 11:46 AM

you guys think that private banks have “learned” from their mistakes?  a month ago, i wanted to refi and was shopping rates, the lender from b of a asked me if i would like to cash out, 90% ltv.. i’m at about 25%... i told her that it would would put me at 40% dti (i was shocked because everyone here was saying 28% dti)... she said we can do loans up to 48% dti…

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Astute Observation by newbie2008
2011-07-19 03:05 PM

Like I said those banks are not private but publically traded corporations, i.e., owned by shareholders.

If the money was coming out of the CEO’s pocket, the lending abuse would not have occurred.  The losses are passed to the shareholder or the taxpayers. 

The other time stuff like that occurs when a private company wants to massage its books before becoming public or trading hands.  Cash out now and let the turd blow up in someone else hands.

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Astute Observation by Perspective
2011-07-19 09:05 AM

“...Do you have $85,000 in a retirement account? Congratulations! Your in the minority for the most part…”

We all know the reasons why you should save, and why you should save in a retirement account.  One of the reasons I’ve always used to keep my 401k contribution rate high is that a sizable portion of retirement accounts can be used as “reserves” in mortgage lending.

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Astute Observation by winstongator
2011-07-19 09:15 AM

First, imo, if you don’t have 85k in a retirement account or other future savings account, you need to have a very high income to even think of buying a $1Mil home - I’m thinking well over $400k/yr.  Even the extremely strained $120k/yr person could get $85k at 10%/yr w/no match in 7 years.

What would motivate someone to get into that $1Mil home with less than $85k in their 401k?  Might it be the potential investment gains from appreciation?

If you look at real estate as an capital appreciation investment, you will put a bigger chunk of your income towards your primary residence.  If everyone in an area does this, you get higher overall price levels.  Rinse/repeat and you can see better levels of appreciation…for a period.  You can only increase your level of income towards housing so far, minus creative financing.  If people are at the max, and the max moves down, then you will see an impact on a market.

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Astute Observation by Perspective
2011-07-19 09:33 AM

“...What would motivate someone to get into that $1Mil home with less than $85k in their 401k? ...”

It’s the same thing that motivates people to finance two luxury cars on a $120K income. Others can see your fancy new cars and your large million dollar home.  But they can’t see your retirement account balance.  You can’t show-off your phenominal balance sheet, or even your great income statement.

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Astute Observation by Soylent Green Is People
2011-07-19 09:43 AM

For a $900k home and 20% down, PITIHOA at 4.25% is roughly $4,800 per month. With no debt and 10k per month, it’s a 48% DTI. That’s just over FNMA’s 45% tolerance, but under their 50% DTI ceiling. There are… were… lenders willing to make these loans as late as July 15th. Remember, FHA allows for 55% DTI if the deal makes sense.

Thanks for enjoying the post.

Soylent Green Is People.

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Astute Observation by Passerby
2011-07-19 10:33 AM

Hands down, this is the best explanation I’ve read anywhere concerning impact of the GSE loan limit changes.  No one else has mentioned the sharp increase in reserve requirements or DTI for jumbo loans. Private loan limits by Zip?  Wow.  Most articles seem to wave away the whole thing with a vague statement that buyers will just come up with a little more somehow.  As you showed here, the amounts needed to make up that difference are a higher hurdle than most realize!  Thanks!

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Astute Observation by winstongator
2011-07-19 11:15 AM

Thanks for the info!

Those numbers were about what I came up with.  In my head, 24% DTI is closer to normal.  So you go to 5% and it’s another $300/mo.  DTI now around 26%.  24 or 26 not a big difference, so no trouble with the higher rates.

The rate is not really the problem, it’s qualifying.

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Astute Observation by Henry
2011-07-19 06:41 PM

But that’s just it.  Technically, a lender might give a loan on a $900K home to a person making $120K.  But it’s madness for both the lender and the borrower.  I make more than that, and there’s no way I can imagine being able to afford those kinds of payments as well as actually live life.  How would that borrower sleep at night?

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Astute Observation by newbie2008
2011-07-19 10:45 AM

I enjoy SGIP’s humor.
When banks use solid and prudent leaning criteria for under writing, the banks is not taking much risk.  The downpayment of 30% and 1% origination fee should cover, one year of squatting and depression on the property.  Say the property prices goes down by a huge 10% and the bank takes 1 year to foreclose (6% lost interest), that would leave a 15% cushion that in theory is refunded to the borrow after fees (6% lost interest, 3% late fees, 1% attorney’s fees, 7% RE fee = ~ 17%) and the banks is whole. With a 20% the bank would need to FC sooner to “stop their losses.”  The borrow is left with a bad credit score and lost of the DP.

The feature property is a short sale?  What the likelyhood that the sale price will be the asking price on a short sale.  The second is not like to agree to take the loss with a smile (unless that loan was sold-off with a real risk assessment/rating).  What about running the rental parity after the sale?

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Astute Observation by FreedomCM
2011-07-19 11:16 AM

$2900 monthly carrying costs?

let’s get rid of that $771 ‘equity payment’ and call it your market risk in a declining market, with some small chance that you get it out at the end.

let’s double that ‘Maint. & reserve’ to $400/month (really, $5k/yr for a 30 year old house is still low)

That brings your monthly cost to at least $3800/month.

And consider your time to mow/maintain. 

And being tied to the local market for god knows how long.

Doesn’t sound like a bargain over renting to me.

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Astute Observation by jb
2011-07-19 06:55 PM

I completely agree. My rental parity numbers are much higher as well…since the first 7 years or so of the equity payment goes to the 6% commissions and selling costs at the end, and the average time in a home is about 7 years.

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Astute Observation by Perspective
2011-07-19 11:17 AM

PIMCO posted an interesting article today on the demand for housing:

“Are There Any Rungs Left on the Housing Ladder?”:
http://www.pimco.com/EN/Insights/Pages/Are-There-Any-Rungs-Left-on-the-Housing-Ladder.aspx

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Astute Observation by Anonymous
2011-07-19 11:20 AM

Irvine condo tower sold out
http://lansner.ocregister.com/2011/07/19/irvine-condo-tower-sold-out/117653/

Forecast: Calif. to power U.S. construction rebound
http://lansner.ocregister.com/2011/07/19/forecast-calif-to-power-u-s-construction-rebound/117693/

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Astute Observation by Oil Can
2011-07-19 12:46 PM

Oh my god this was a funny post.

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