Nearly 50,000 locals still underwater

Homes are lined up near Carmel Valley.
Homes are lined up near Carmel Valley. — K.C. Alfred

By Jonathan Horn

Tens of thousands of San Diego County homeowners continue to owe more on their properties than they are worth, despite the run-up in prices that has taken place over the last two years.

In the second quarter of this year, there were 46,585 county homeowners underwater on their homes, real-estate tracker Zillow reported this week. Those with negative equity make up about 10 percent of property owners in the county who have a mortgage, down from 21 percent in the second quarter of last year.

The homeowners were underwater despite an increase in the county’s median home price of more than $100,000 over the last two years.

“There were a lot of people that got caught at the top (of the housing bubble),” said Mark Goldman, a loan officer and real-estate lecturer at San Diego State University. “During the run-up, people were just out at a frenetic frenzy in 2006 and 2007. They didn’t care what price they paid for property.”

Negative equity in the county peaked at 35.6 percent of homeowners in the first quarter of 2012, but it appears those remaining underwater bought in areas with new construction completed just before the housing crash. Most of the negative equity in the county is in Chula Vista, Oceanside, San Marcos, Spring Valley and El Cajon.

As a whole, San Diegans who are underwater collectively owe $6.14 billion. That amount, however, should continue to decrease as San Diego home values rise, and people regain equity in their properties.

For example, in June, the median sale price in the county was $450,000, up 8 percent from June 2013, and 34 percent from the median in June 2012. Still, that’s a long way from the peak median of $517,500 in November 2005, according to CoreLogic DataQuick.

Zillow predicted that by the second quarter of next year, the percentage of homeowners underwater will decline to 7.6 percent in San Diego County.

“We knew it was going to take a long time to correct,” Goldman said. “There’s always going to be properties that are upside down. Is this more than normal? Yes, but we’re returning to a more stable market, and there will be people who just simply have paid too much for their property.”

Christopher Thornberg, founder of Beacon Economics of Los Angeles, said the move-up market will get a drastically needed boost as people regain equity in their homes.

“More of that equity means that people are going to have better access to capital, they’re going to have more money to put down on other properties,” he said. “The move-up buyer is the kind of buyer that drives new home construction.”

Nationwide, 17 percent of homeowners, or 8.7 million, were underwater in this year’s second quarter. Of the nation’s 35 largest metropolitan areas, San Jose had the lowest percentage of property owners underwater on their homes, with 4.6 percent, while Atlanta had the highest at 28.9 percent.

How to get Rid of your Mortgage Insurance

For FHA loans endorsed prior to June 3, 2013, the MIP cancellation terms are as follows:

  • 30-year loan term : Annual MIP is automatically canceled once the loan reaches 78% loan-to-value and annual MIP has been paid for at least 60 months.
  • 15-year loan term : Annual MIP is automatically canceled once the loan reaches 78% loan-to-value. There is no requirement for MIP to be paid for at least 60 months.

Note that the loan-to-value calculation is not based on the current appraised value of the home; it’s based on the FHA’s last known value of the home. In many situations, the last known value is the home’s purchase price.

Using these rules, homeowners with a 30-year fixed rate FHA mortgage must pay mortgage insurance for at least five years before it can go away. Homeowners with a 15-year fixed-rate FHA mortgage can have MIP removed as soon as LTV drops to 78%.

 

Lender revives housing boom-era mortgage concept

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As mortgage rates continue to hike up, some lenders are bringing back ‘lock and shop’ programs to assist borrowers in purchasing a home.

Privately owned Premier Nationwide Lending is the latest to join the ranks of those offering the ‘lock and shop’ program to homeowners.

The company will credit approve a homebuyer and then lock in their interest rate before they find the property they want to buy.

The process is quite simple, if mortgage rates goes up, the borrower still gets the lower, locked rate. And if the rates decline, the homebuyer will have an option to float down to lower rates, explained Premier Nationwide Lending CEO Brad Sullivan.

The ‘lock and shop’ program isn’t a new tool to the market. In fact, most lenders removed their programs when volatility hit the market, argued 360 Mortgage Groupchief operating officer Andrew Weiss-Malik.

The sudden attraction back to a program that seemed to provide more liability than advantages is the lending environment’s increased need for competition.

By lenders staying at the cutting edge of trends within the space by trying new products to beat out the competition, mortgage professionals could use the program to increase their business growth as well as demonstrate the use of the product.

“Many lenders are scrambling for loans and looking for any competitive edge they can find,” Weiss-Malik said.

He added, “In addition, as the lending market becomes more competitive, some lenders are exploring riskier products to replenish declining loan volumes.”

Some are returning to products traditionally thought of as riskier to lenders than, say, a 30-year fixed rate mortgage. It’s a demand driven concept whereby even housing advocates are asking for more homebuying finance optionsQuicken Loans recently, as an example,extolled the virtues of the adjustable-rate mortgage.

The biggest challenge of the ‘lock and shop’ program is that during the property search process, homebuyers are seeking the lowest rate, which implies that borrowers may prolong the search to get the best rates possible. The ‘lock and shop’ programs historically lower pull-through rate and guaranteed float down rate negatively impacts a hedge position, exposing lenders to increased risk, Weiss-Malik explained.

Put simply, the company offering the program must hedge against the interest rate risk because the potential borrower may take up to a year to find a home since no time frame is given within the program.

Consequently, given the new Consumer Financial Protection Bureau’s involvement in the market to monitor fair lending practices, “it is crucial that both borrowers and lenders document the programs functionality and fees thoroughly or they may expose themselves to legal and regulatory liability,” stated Weiss-Malik.

“The threat of increasing interest rates stripping away a borrower’s loan approval is removed from the equation,” stated Premier Nationwide Lending vice president of regulatory affairs John Hudson.

He concluded, “This means less fallout and a greater opportunity to deliver excellent service to our borrowers and referral partners. In addition, loan professionals want to work for a company that offers these types of innovative programs. Prospective employees are drawn to the ability to offer the ‘Lock and Shop’ program.”

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