The Regan Team - Petaluma Homes & Mortgage Blog - PetalumaLending.com: July 2010

I live in beautiful Sonoma County California and we’re one of the first counties in the nation to have a property assessed clean energy program or PACE for short.  This program allows homeowners to energy retrofit their homes and finance those upgrades through their property taxes. 

Upgrades can range from new dual pane windows to full solar systems.  The cost of these upgrades is paid for by adding an assessment to the homeowner’s property taxes for up to 20 years.  Residential properties as well as commercial can take advantage of this program; the interest rate is about 7%. 

If a homeowner upgraded the windows, heater, and insulation in their home and it cost $30,000, if they chose to pay it over 20 years it would add $2791.08 per year to their property tax bill or $232.59 a month. 

This added assessment is like any other school bond etc. and when the homeowner sells their property the assessment is passed on to the new owner until paid off.

This program is truly is a brilliant idea and is a win win for everyone.  Homeowners are able to make their home more energy efficient, they get to write off the cost of the improvements on their taxes, and it has created a lot of good paying local jobs.  I’ve seen more solar and energy retrofit companies started in the past year and a half than I have the last 10. 

On a personal note my parents were one of the first to use this program and replaced all their single pane 1970 windows to new dual pane energy efficient ones.  They’re saving over $200 a month on their PG&E bill. 

Every day we hear or read about becoming a more energy efficient nation and we’re all encouraged to conserve as much as possible.  So you would think a Government entity would support this program.

Of course NOT!  What was I thinking?

On July 6^th 2010 the Federal Housing Finance Agency released this memo:

http://www.fhfa.gov/webfiles/15884/PACESTMT7610.pdf

The person who wrote this seems to believe this program somehow interferes with the lien position on mortgages.  In the memo it states:

“First liens established by PACE loans are unlike routine tax assessments and pose unusual and difficult risk management challenges for lenders, servicers and mortgage securities investors. The size and duration of PACE loans exceed typical local tax programs and do not have the traditional community benefits associated with taxing initiatives.”

The PACE program is set up just like a routine tax assessment.  As always property taxes are going to take precedence over any other type of lien and this doesn’t change that fact. It is exactly like a school bond, mosquito abatement, or water district assessment that’s added to your property taxes. 

With the mass of foreclosures and property taxes many times not being paid, the PACE assessment would add a small cost to the monthly taxes the banks would be responsible for.  In the above scenario if the previous owner did $30k in work, then $232.59 would be added monthly to the normal tax bill.  Again if a school bond passed and it added $200 a month to the property tax bill, tell me how this is any different?  This is not a valid reason to kill this program. 

The part stating the program doesn’t have any traditional community benefits is confusing too.  So what the person is saying is that saving money, making our homes more energy efficient, and providing local high paying clean jobs doesn’t help our community?

It gets better though.  Fannie and Freddie have been directed to:

-Adjust loan-to-value ratios to reflect the maximum permissible PACE loan amount available to borrowers in PACE jurisdictions

-Tighten borrower debt-to-income ratios to account for additional obligations associated with possible future PACE loans

According to this any homeowner in a PACE county would have their loan to values reduced by say 20% because they could possibly get a $100k PACE “loan” even though they’re buying a home that’s already been fully upgraded and have no use for it.   Makes perfect sense if you’re working for the Government right?!  Hummmm…

The next one is even better.  Tighten debt to income ratios for a borrower because they POSSIBLY could get a PACE “loan”.  What’s next add a $500 monthly payment to a borrowers debt to income ratio because they have an 800 FICO and could POSSIBLY take out a credit card for $50k?  How would they determine the debt to add to each borrower?  This one alone is a logistics nightmare.

The PACE program is very simple and easy to understand if one takes 5 minutes to read the details.  After reading this memo I’m under the impression the person or persons responsible for it failed in their duties to educate themselves before making such a rash decision. 

This is a great program designed to help our old housing stock become more energy efficient and to create clean high paying jobs.  What is wrong with that?  Is it too good for us? 

As a Mortgage Banker in Petaluma, California I have spoken to several people who tried to refinance their current loan and were unable to because the bank required them to pay off the PACE assessment and treated it as though it was a normal loan.  It has also come up during a home sale where the seller had to pay the assessment off in order for the buyer to obtain a purchase money loan. 

I have yet to see any investor memos implementing the new directives and I hope I don’t.

Supposedly the local Politicians covering Sonoma County are working with the powers that be to fix this issue but if a resolution is not met this program and all it’s benefits would be wiped out. 

With the constant changes to underwriting and guidelines the lending environment is more complicated than ever before.  You can stand in a room with 10 loan originators and get 10 different answers to what you think is a simple question. 

There are two main reasons for this:

-Investor overlays.  I don’t know of an investor that doesn’t add extras to the existing guidelines.  They can range from extremely conservative to very minor and they vary.  If lender X uses a certain investor that sets the maximum debt to income ratio at 45% and lender Y uses an investor that allows up to 56%, obviously if you ask them both what the maximum debt to income ratio is you’ll get two different answers and they’ll both be correct.  This has led to a lot of confusion and uncertainly in the lending business; you can be correct and still be called a lair and an idiot.  This is one of the most frustrating situations as a mortgage professional. 

-Interpretation.  This is another trouble spot.  Most guidelines are cut and dry but there are those that are vague and left up to the underwriter’s discretion.  Take for example FHA’s guidelines on employment history:

FHA does not impose a minimum length of time a borrower must have held a position of employment to be eligible. However, the lender must verify the borrower's employment for the most recent two full years. The borrower also must explain any gaps in employment spanning one month or more. To analyze and document the probability of continued employment, lenders must examine the borrower's past employment record, qualifications for the position, previous training and education, and the employer's confirmation of continued employment. A borrower who changes jobs frequently within the same line of work, but continues to advance in income or benefits, should be considered favorably. In this analysis, income stability takes precedence over job stability.

Some loan officers take the meaning literally and say that FHA has no minimum employment requirement.  Most investors also have this guideline:

Re-entering the Workforce:

The income of a borrower re-entering the workforce who does not have a 2-year recent work history may be considered with

-Evidence the borrower has been at the current employment for a minimum of 6 months, AND

-Documentation in the file that supports a previous employment history.

These two guidelines contradict each other but both are correct. 

In this case if a Doctor has been working for 5yrs and leaves his current employment to become a doctor at another hospital then there isn’t a need to wait to include his income.  He has shown a steady employment history and is in the same line of business.

Conversely a nurse has just completed her certificate program and begins to work.  She has no history in this line of employment and went from earning very little to now earning a good paycheck.  She has not proven the income or employment stability that FHA requires and needs to wait 6 months until her income can be counted. 

In this scenario if you asked 2 loan officers if the nurse could get a loan a month after starting her job you’d get two different answers but only one good outcome. 

Interpretation is another major reason why loans are denied.  One loan officer could quickly glance over the guidelines without delving into what they really state and end up with a messy denial while another mortgage professional who studies the guidelines and a has a good grasp of what is acceptable in this lending environment will get an approval.

Guidelines are a starting point, not an end all.   Real human underwriters will review each loan on a case by case basis which leaves more room for interpretation.  Just because the guidelines state one thing, that doesn’t mean every loan will get through.  In the examples above the Doctor would have a great chance getting approved now while the nurse would have to wait 6 months otherwise face a high probability of being denied for the loan. 

The next time you ask what you deem to be a simple loan question realize there's not a simple answer.

The FHA 203k rehab loan is a great program that’s helped thousands of people buy their dream home.  With the ability to finance construction costs and a 3.5% down payment, this segment of the market is growing.  With many foreclosures and short sales in disrepair as well as an aging housing stock, 203k’s will help rebuild our communities.   

As their popularity grows so do the misconceptions.  To get an understanding of what the 203k is all about here are a few things to consider before submitting an offer with a FHA 203k loan:

-Is there enough room for the repairs?

If a home needs $75k in repairs and is listed for $350k in a neighborhood of $350k properties, it’s not going to work.  You need to make sure the home will appraise including the repairs.  In this scenario, if the sales price was $275k then you’d be right in line to add $75k in construction costs. 

-I want to add a second story/redo the foundation/fix a major mold problem/tear down walls; will a 203k work?

Yes and No. While FHA does allow for these types of repairs many investors/banks etc. have their own overlays that will not allow these types of repairs due to the liability.  If you’re thinking of doing a major renovation speak with your lender to make sure they offer these repairs.

Most 203k’s include new carpet, paint, roof, kitchen, bathroom, landscaping, appliances, etc.  Most lenders are OK with these upgrades as long as you’re not changing the current lay out of the house.  For 95% of the properties the 203k will work great, but if you’re looking for a full rebuild, many lenders will not allow it. 

-Any contractor will be fine for the 203k, right?

Wrong.  It’s best if you hire a contractor who’s worked on a 203k project before, that way they know how it works.  The two issues I run into with new contractors is they don’t have the right insurance and they don’t have the capital to wait for payment once the job is completed.  

I recently had a contractor refuse to get workers comp insurance until the loan was approved, the problem was we couldn’t approve the loan until he got insurance.  I can understand that he didn’t want to pay and be left with nothing if the loan didn’t go through but to do work on 203k’s that’s a must. 

Once the work is completed it can take up to 90 days for the contractor to get paid.  If they don’t have the capital to make it that long then you need to find one that does. 

-Do I need to use a 203k Consultant?

If you’re doing a streamline 203k (repairs under $35k) no, but I recommend it.  On a full 203k (repairs over $35k) it’s a must.  A good HUD approved 203k consultant is your protection.  They’re going to inspect the home to find what needs to be fixed, what should be fixed, and then what you’d like fixed/upgraded.  They’ll see things you may not saving you from future problems and help you through the process from start to finish.  A good 203k consultant is worth their weight in gold. 

Here are a few other blogs on the FHA 203k rehab loan:

FHA 203k Rehab Loan

Streamline FHA 203k Rehab Loan

When you read the paper or watch the news concerning the housing market, the talking heads love to blame the mess we’re in on the terrible ARM’s.  Some “experts” say we should get rid of adjustable rate mortgages altogether and Congress loves to regulate them to death. 

As a loan originator in Petaluma California I’ve spoken to many clients about ARM’s and most are scared of the idea.  The fear is simply from the unknown.  They hear or read about a 15 or 30yr fixed rate mortgage as being the only way to go.  They’ve heard about rates tripling monthly, evil prepayment penalties, negative amortization, etc.  While those are valid concerns most people don’t realize that the “evil” ARM’s they’re speaking of don’t exist anymore. 

The adjustable rate mortgages that do exist today are very simple.  They’re either interest only or fully amortized (paying principal and interest with every payment), the majority have no prepayment penalties, and there are caps on the amount the interest rate can change.  All these items are addressed in the loan program disclosures, which are now about 80 pages thanks to the increased regulation. 

So why would someone want an ARM? Simple, to save a lot of money!

The national mortgage age is about 5-6 years.  That means most people refinance or sell a property every couple of years.  So if you’re going to refinance or sell your home in 5-6 years why would you pay extra for a 30yr fixed mortgage?! 

Take this example:

$450,000 mortgage

Option 1 – 30yr fixed mortgage at 4.5% would cost you $101,250 in interest over 5yrs

Option 2 – 5/1 ARM at 3.375% would cost you $75,937.50 in interest over 5yrs saving you $25,312.50

There are consumer protections in Fannie/Freddie ARM’s too.  The standard LIBOR ARM’s offers a once a year adjustment after the fixed time expires with a maximum rate increase of 2% and a lifetime cap of 11.95%

In this worse case scenario at year 6, the maximum rate would be 5.375%

If 5yrs is too soon there are also 7/1 and 10/1 adjustable rate mortgages available.

Granted not everyone is cut out for an ARM but in many cases they’ll save a lot of money and may make the most financial sense depending on the client’s situation.  That’s why it’s important to find a local qualified mortgage originator to go over all the options. 

Don’t be scared of ARM’s!