California Mortgage Home Loan Brokers

Is this a good time to buy or refinance?

I think it depends on your needs and where you are in your life. It's always a good time to buy. There is always a deal to be had. Are we at the bottom of this housing market? I don't know, and anybody who says they do know is misleading you. So you have to look at your life, what your needs are, your family, your employment and decide.

Don't look at this as a real estate investment. I can tell you with a high level of certainty that whatever you pay for a house today, at some point in the future, it will be worth more. There is no way around it. It’s simply an issue of supply and demand.

If you look at Los Angeles County specifically, and at California as a whole, there are just more people moving into this state than there are moving out. I can't tell you what the housing market will look like six months from now, but I can tell you what the housing market will look like six or seven years from now, and houses will be more expensive, not less. It's no different than with any supply and demand issue.

How's the secondary mortgage market these days?

It's as bleak and dismal as it has ever been.

What is the secondary mortgage market and why is it important?

The secondary mortgage market is a group of investment banks, including two government-sponsored enterprises called Fannie Mae and Freddie Mac, that purchase home loans and thereby provide liquidity so that the same money can be lent time and time again.

You can think of it in terms of a big circle. It's regenerating the money that is lent out so that it can be lent to other people, and that is accomplished by a bank selling its mortgages to an investment bank, or to Fannie Mae and Freddie Mac. They take those loans and they use them as collateral for bonds. Those bonds are bought by a municipality in Sweden, or an insurance company in the United States or a lady in Pasadena.

Anybody and everybody in the world can be a buyer of these bonds. And when they are bought, the money goes back into this big circle of life called the mortgage business, and the same money is lent over and over again. That is the function of, and the only requirement of, the secondary mortgage market.

Something broke there, right?

Yes. Investor confidence, whether the investor is a municipality in Sweden, a pension fund, an insurance company, or a private investor or anybody reading this, somewhere along the line, those investors -- institutional or otherwise -- lost confidence in those sorts of bonds. Therefore, they don't buy them anymore. The chain is missing a link. The circle is broken. When that happens, the space collapses, and that's what we're witnessing today.

All this is because of non-performing assets. You can argue why those assets don't perform, and that's for another conversation. But nevertheless, that's the problem.

What does a home buyer need today in order to qualify for a loan?

The guidelines have been tightened down. The mortgage business's reaction to the problem is to restore confidence in the investors that buy these loans, and one way of doing that is to help ensure the investor has a mortgage that is likely to perform. In order to do that, they crank down their requirements.

The borrower is going to need to bring money to the deal. You don't see 100% financing anymore, so you're gonna have to bring cash to the deal. You have to have better credit than was required even last December, typically FICO scores about 660, preferably 680 to north of 700. You very often will have to prove your income. The days of the 90% to 95% loan value, based on stated income, do not exist anymore.

Lenders want to see borrowers prove their income. In some cases, that's difficult to do. There are lots of small business people out there who don't report all their income. They may make a lot more money than they show on their tax returns. They depreciate their automobile, or they take write-offs for their cell use, etc., to reduce their tax liability. Unfortunately financing is increasingly difficult for these individuals.

So those three things -- money into the deal, credit worthiness, proof of your actual income -- are the three major things that have been tightened down, and these are the guidelines the borrower will now need to adhere to.

People hear that folks with "good credit" are being turned down. True?

True, but you have to look at this as a puzzle with more than one piece. If you have a credit score of 740 and you're looking to purchase a $900,000 property, with $25,000 down…you don't get that deal anymore. Here's an analogy. You told your kid he could have ice cream every night before dinner for a year, and one night you say, "No more ice cream before dinner." That's what the outcry is about. It's easy to give something, but harder to take something away.

The 100% loan to a million dollars to a person with a 620 credit score was ice cream before dinner. There is no more ice cream before dinner. And so you see a lot of articles about, "Hey we can't get a loan, we've got great credit." Well, you're not putting any money down. Or you don't have a job. Or you can't prove your income. These are part and parcel of making a credit decision. It's not just about your credit score.

There were loans out there that were just credit driven, a year, or a year and a half, or two years ago. They just don't exist anymore.

What sort of down payment can buyers expect to have to make?

Certainly 80% loans -- meaning, a 20% down payment -- are out there. You can go as high as 90% financing, and under some government programs, as high as 97%. But you're going to have to have good credit and you're gonna have to be able to prove your income. And your income is going to have to be sufficient to support the debt that you are about to undertake.

Up to 97% financing, meaning a 3% down payment.

Yes, 3% down is currently available through FHA, where the lender's position is guaranteed by the government. This loan amount is restricted to approximately $725,000, and requires good credit and that the borrower be able to prove his or her income. Proving income means demonstrating real -- not pretend -- income through tax returns or W2s, and having a credit score and history that reliably demonstrates that they are going to repay the loan.

How much further will home prices fall?

As I said earlier, nobody knows the answer to that. My opinion is that we will continue to see a decline in home prices for at least another 12 months. There are experts out there who would disagree, who are a little more optimistic than that. There is no real model to predict this, to demonstrate where the bottom is. Homes are not a terribly liquid asset, so there's no real understanding of where the bottom and the top of the market will be. You have to have some hindsight.

I think we will need more time before this problem works itself out. The market will continue to be flooded with homes that would not otherwise be on the market. A lot of people are stuck in loans that they cannot refinance, and when the payments get too high, they walk away. That cycle has not worked itself out. Product is flooding the market. This is a simple supply and demand curve. The more supply you have, the more prices will fall.

Somebody looking at buying a house today faces the prospect that the value of that house will decline some over the next year or two. Under what circumstances is buying a house today a good idea, or a bad idea?

My answer to that question is: Look at your life. If you want to move up, or you have another child, or you need more space, then you need to mix that against the fact that there are good deals out there. Is this the bottom of the market? I don't know.

There's an old expression on Wall Street that bears and bulls survive but that pigs get slaughtered. That means if you are trying to time the top or the bottom of the market -- or if you want to sell your shares in Coca-Cola at its five-year peak -- well, you're a pig. Have you made a profit, or not? Or is your money better allocated doing something else? That should be the decision making process, not: "Is it a five-year high?" Don't be a pig.

The housing market is no different. Don't look at that house in terms of being a professional real estate investor. The question to ask is: "Does it fit my needs and lifestyle now?" Understand that if you have mistimed the very, very bottom of the market…so be it. You got a good deal and there will be a time in the not-too-distant future, by the simple laws of supply and demand, that your home will be worth more than you paid for it. If you need another bedroom because you just had triplets, hey you need to buy a house. It's not about timing the bottom of the market.

It's also about a long-term view, right? What about if you're thinking about buying today and selling in two years?

It's not about that. You're not a real estate investor. You need a house. You need a house because you're gonna raise your kids. "Hey, I want a workshop," or, "I always wanted a three-car garage." Or whatever it is that fits your lifestyle. "I'm tired of living in an apartment. I've done it my whole life. I want to park my car in a garage and walk into my house, and I want to put a woodworking shop in the back yard. I can't do that in my apartment. That's what I want."

There are a million different examples, but at some point, it's going to be a really good decision. Yes, it needs to be a long-term deal, it's not a "Hey, I bought this house for half a million dollars, and in six months it'll be worth $700,000." It's a bad way to look at it. It was just speculative. The value of the house is just a number on a piece of paper. It doesn't mean anything until you go to sell the asset.

The house I'm living in now I bought in 1998. My kids go to school around the corner, and my wife tends the garden. I work in the neighborhood. I have family and community ties there. This is what owning a home is about. It's not about, "I have to make $300,000 by selling my home in a big spec market."

Purchasing a home now shouldn't cause worry. Some say, "Well, it's a terrible time." Interest rates are low, money is cheap, go out and buy a house if it fits your lifestyle. Relax, cool your jets. Ultimately, it’s a great investment.

What needs to happen in order for there to be a turnaround of the mortgage industry?

The mortgage industry will straighten itself out and confidence will be restored. The government will make sure of that. Fannie Mae and Freddie Mac, the two government-sponsored secondary market participants, will continue to exist. The investment banks of the world will reenter the mortgage space, and confidence will come back to the housing market. Excess inventory will be eaten up. It's a cycle and the cycle will change. Business cycles always do, and real estate is a cyclical business. All those things will slowly come together to change the residential real estate market.

Different areas, such as Los Angeles and Las Vegas, will recover in slightly different time frames, based on the demographics of particular areas. It will change. It's undeniable.

What's the biggest mistake homeowners make in this mortgage and foreclosure crisis?

I think the primary mistake made by homeowners who are in a position to continue to make their payments is that they don't take a long-term view. They need to understand that their home has, and will continue to have, value in it. Will it have more value in a year or two or three or 20? It almost certainly will. If I can give any advice at all, it is: Realize that market conditions are cyclical and think about it long term. If you can hang in there, then hang in there! Things will change. Continue to make your mortgage payments.

Pay attention to your mortgage, and if you need to, call a mortgage professional that you trust and see if there are alternative financing options to the one that is currently in place. Sometimes there will be, and sometimes there won't. Give California Mortgage Home Loan Brokers a call. We would be happy to discuss the options with you.

(Interview conducted on May 5, 2008.)

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