That’s the issue – Lenders want the housing market to recover before they open up up the lending markets. Mortgage guidelines will not loosen until the housing market and the overall economy shows signs that we are well into a recovery. And the housing market will likely not see a strong recovery until homeowners can avoid foreclosure, by refinancing out of risky high interest loans, and buyers can start purchasing with more aggressive financing terms.
So what comes first – the chicken or the egg?
This is the current dilemma we’re facing but there are some positive measures being taken, for instance the government is trying to intervene by providing historically low interest rates. The Fed has been spending billions of dollars buying up the secondary mortgage market and providing tax credits to first time homebuyers to spur purchases. And in an attempt to keep current homeowners in their homes they are offering loan modification programs and refinance programs for people that can prove their income and prove they can afford their housing payments under modified terms - see Making Home Affordable program.
What we are witnessing in our local market area, throughout Silicon Valley, is that most homeowners who purchased between 2004 and 2006 have larger loan amounts than allowed through the government's current housing affordability programs, and the lenders and investors whom own these mortgage notes do not have any financial incentives to work with these high loan amount borrowers other than to avoid repossessing their homes through a costly and very lengthy (thanks to CA politicians) foreclosure process.
But until these lenders and investors realize how to communicate internally in order to quickly help homeowners with a modification or short sale in lieu of foreclosing on them, we probably will continue to see the higher-end local housing market suffer. Just to demonstrate the lack of communictaion taking place in the jumbo mortgage market, loan servicers are reluctant to offer defaulting homeowners payment plans or modifications to their mortgages without the underlying mortgage-note holder's (investor) permission as they do not want to be sued by the investors. Adding to the confusion is that these underlying investors can be anything from a small community bank or credit union on the east coast, to international investors, or even small groups of money market funds - making communication a seemingly impossible feat.
And while banks are still foreclosing on these larger, more aggressive loans, they will not start providing funds for new loans until things have stabilized. The government’s financing intervention can only provide mortgages up to $729k in our area leaving the higher end homes – like those in Willow Glen area – out of reach for the majority of high-end buyers. Any homes selling for above $800k will require true “jumbo” financing and requires a large down payment (up to 30%) which most buyers are just afraid of making in the current downward housing market. And jumbo loans have even more stringent guidelines than their conforming loan counterparts.
The good news is that the bottom of the housing market in our immediate area is starting to rebound nicely as first time homebuyers and investors are gobbling up inventory. First time homebuyers are finding that affordability has returned to the housing market, especially when they can own a home for just about as much as it would cost to rent these days, taking into consideration their mortgage interest deduction of course. And investors are now able to purchase homes, with 20% down, and immediately realize positive cash flows from their investments.
We are especially experiencing this in areas such as Santa Teresa, Blossom Valley, Cambrian and Campbell. The median home prices in these areas has fallen enough to allow first time homebuyers higher affordability which is causing bidding wars to break out on many bank owned foreclosure sales.
Hopefully the demand for housing in theses areas continues to eat up any additional supply which will eventually bring price stability to the higher end homes.
