Charm City Baltimore Real Estate: Baltimore, Maryland Real Estate & Homes

First in the Mortgage Financing series of podcasts. In this edition, guest podcaster Richard Pazornik of SunTrust Mortgage talks about the loan application process, how to prepare for it, and what to expect.

For a transcript of this podcast, please email me at .

Second in the Mortgage Financing series of podcasts. In this edition, guest podcaster Tom Latta of Prosperity Mortgage talks about the choice of loan product, downpayment options, and other sources for financial assistance.

For a transcript of this podcast, please email me at .

According to a recent article in the Wall Street Journal, Fannie Mae is in the process of tightening the requirements for condominium mortgages at the very moment in time when home lending of all stripes needs a boost. We are also about to see a flood of new condominium units come onto the market — those projects where financing had been obtained and construction begun before the lending meltdown took place — and these new rules will certainly make it more difficult for those developers to avoid bankruptcy.

First the specifics: Fannie Mae has always had restrictions on condo lending, in particular the requirement that the developer own less than half of the units in the building. That requirement will now be greatly increased, so that a developer will have to have sold at least 70% of the units before Fannie will guarantee the mortgage. The new rules will also require that a purchaser have at least 25% downpayment to avoid paying a closing cost penalty of .75% of the loan — no matter what the purchaser’s credit score. It keeps going. Fannie now will not back the loans in an existing condo association where 15% or more of the residents are behind on their condo fees, or where a single outside entity owns more than 10% of the units.

The mortgage giant defends these new policies as being careful with the taxpayer’s money by not taking responsibility for loans made in speculative or failing condominium developments, while ignoring the fact that these tightened rules make it more likely that currently healthy communities will be weakened. In many cities, condominiums are the least expensive option for home ownership and serve as the entryway for first time homebuyers, so these rules are making it tougher for new purchasers to enter the housing market and help drive down the excess inventory that has been built up over the last three years.

The inventory of unsold condo units will only swell as projects currently under construction start to open sales offices. According to the National Association of Realtors, the United States ended 2008 with a fourteen month supply of condominiums on the market, the highest backlog since they began keeping records ten years ago. In 2009, industry sources estimate that another 93,000 brand new units will enter the market across the country — a whopping 12,000 of them in the greater New York City market alone. Not only will these units be more difficult (if not impossible) to sell given the new guidelines, but even some of the pre-sold units may not settle since lenders now have these new rules in place that will “de-approve” buyers who thought they had a loan locked in. Never mind the fact that these units may also be worth significantly less than their pre-construction pricing a year or two ago.

Sometimes that Law of Unintended Consequences is a real bitch.

In the last few months we’ve seen a growing number of so-called “short sales” in our market place, and around the country. While the name implies that the sale will leave the borrower “short” of the full amount needed to pay off the mortgage, there’s nothing “short” about the amount of time it takes to actually accomplish the sale. Short Sales, in fact, take forever. In 2008 I personally had clients who tried to buy a Short Sale. After eight weeks of waiting, the case had barely budged through the bureaucracy at Wells Fargo, and we were told it would take at least another eight weeks to be processed and reach the settlement table. National City, to their credit, had cleared the property within two weeks, since they had the second mortgage and were most likely not going to get a cent. My clients, who were purchasing a primary residence, simply couldn’t continue to put their future on hold. We found another house.

This one experience is an all-too-common example of what Short Sales are like. They are the real estate equivalent of Chinese water torture. In the past more than 80% of them fell apart before they could settle. Not exactly an efficient model of disposing of bad assets, eh?

So, its with some relief that we read that Fannie Mae is field testing a process that will shorten the time it takes to achieve a Short Sale. Relief, that is, until we read just what the process IS.

Our brightest financial minds have come up with a plan to “pre-approve” a property for short sale, even before a buyer has been found. Its proponents say that it will save the paperwork and bureaucracy of trying to find out what amount of loss Fannie will take and allow the purchase to proceed much more rapidly. Huzzah!

Except that the short sale I was involved with never got to that point after eight weeks of waiting. Wells Fargo had just gotten around to appointing a negotiator for that property to begin the process with Fannie (and meanwhile, the foreclosure department at Wells had started implementing foreclosure, blissfully unaware that there was a contract pending in the short sale department). And what about the fact that most properties are spending so much time on the market waiting for a buyer that the property might actually depreciate from the time the value was determined and approved and the time a contract is written. Oh yeah, and will the buyer try to negotiate down from that price? YOU BETCHA.

This “new process” is another screwball idea from the people in Washington who didn’t see the problem coming. President Obama seems to be coming around to the point that the previous administration’s appointees never reached… just take over the bad assets. Get the commerical banks out of the picture, get these mortgages off their balance sheets, and lets revive the housing sector. Once these assets are fastracked for disposal, the short sale process can truly be streamlined. Nothing else will really do the trick.

Several publications have reported disturbing trends, which may offer some insight as to why the Fannie Mae and Freddie Mac bailout has now taken place. The Saturday, September 6 issues of both the Baltimore Sun and Wall Street Journal reported an increase in late payments and foreclosure proceedings for PRIME loans, not the sub-prime loans that started this crisis rolling. It is this weakening of the payment record of borrowers previously considered A-paper — strong, qualified loans — that is the most troubling development. It also gives a sense of why the government felt it important to reorganize the two GSEs now rather than later.

The Journal reported that the worst states in the nation continue to be Florida and California, along with Nevada and Ohio. Second tier problem states included Maine, Rhode Island, Michigan, Indiana, Illinois and Arizona. All of these states had rates of foreclosures above the national average of 2.75%. The Mortgage Bankers Association reported that nationwide,  among mortgages on one-four family homes, over 9% were at least 30 days overdue or in the foreclosure process, up from 6.25% a year earlier. It was also the highest level since the Association started collecting figures 39 years ago.

Maryland, while not among the most troubled states, still has growing issues. Among these same “strong” borrowers, while we are among the states at or below the 2.75% rate of loans in foreclosure, the rate goes up to 4.3% when you include those who were at least 30 days late in their payment, according to the Sun.

Maryland looks worse when you turn to look at the sub-prime loans. According to the figures complied by the Federal Reserve Bank of Richmond (whose district includes Maryland), 5.84% of owner-occupied homes have sub-prime loans. Of those households, a troubling 10.55% are either in foreclosure or have already been foreclosed upon, and those houses are now sitting on the market for sale. Within the state, Prince George’s County is identified by the Fed as having the worst foreclosure problem. Other secondary foreclosure clusters pop up in sections of Baltimore City.

Fortunately there are blurbs of good news. On September 9th’s edition of PBS’ Nightly Business Report, the CEO of Coldwell Banker Real Estate confirmed nationwide what I reported a few days ago from my own experience — activity in the last few weeks has picked up in real estate offices around the country. With the bailout of Fannie and Freddie expected to make mortgages more affordable and hopefully easier to obtain, at least for a few months, we should be able to work out of some of the excess inventory and stabilize home prices. Not a moment too soon.

Most Realtors I’m in contact with on a regular basis here in Baltimore are seeing some positive signs as we head into autumn. August has been the busiest month this year, perhaps in the last several years. The phone is ringing, buyers are beginning to come back to the marketplace, and a few are even writing contracts. August, even in good years, can be slow because of family vacations and of the heat — who wants to see houses when its 95 degrees with 80% humidity in Baltimore? But this year, that didn’t stop people.

And in mid-August, the large new-homebuilder — Toll Brothers, Inc. — publicly released statistics that were some of the most hopeful we’ve seen in two years. Their quarterly guidance talked about a declining rate of cancellations, and signs of “growing pent-up demand” from people who have delayed buying while the market was crashing and financial institutions were imploding. (Wall Street Journal, August 14)

We’re not out of the woods yet, as today’s continued bad news from Freddie and Fannie clearly remind us, but its nice to see both local and national signs that we *may* finally be bottoming out.