Archive for the ‘Mortgage / Financing’ Category

What is a Short Sale?

Monday, March 10th, 2008

Piggy BankMarch 10, 2008

Short Sales are relativity new to the real estate/banking world.   What is a short sale and how do they affect buyer’s, seller’s, and banks.  Simply put a short sale is where a home sells for less money than the seller owes the bank and/or private lender.

For example, if you owe $500,000 on a house but it sells for $350,000 you are short $150,000 of the amount needed to pay off your loans.  Usually, because of commission, taxes, late payments, and expense the “short” amount might add up to another eight or ten percent, in this example the seller might be short $190,000.  What happens now, doesn’t the bank still want all their money?  Of course they want all their money but what are they to do if the seller does not have any money and the house value has declined?  What they do is eat the difference, the short amount. 

The bank will usually forgive the borrower the short amount and write it off as a loss.  They made a bad business decision and have to pay for it.  Usually they lent the buyer %100 of the money needed to purchase the home, and often without supporting documentation on the buyer’s income or assists.  It is called loose underwriting and those days are over.  It really was a dumb idea; when you think about it, even if the value of the home remained stable the bank would have expenses if they took back the home to sell.  In a declining market it just makes it that much worse.  Is this predatory lending, yes in many examples it is.  Did the buyer’s lie on their loan application?  Sometimes they did but other times the mortgage broker filled in the numbers.  Did the buyer’s know their interest rate was going to jump in a few years?  Many did but maybe he was not given all the information up front.

Okay, so we learned the bank eats the lost money but what happens to the buyer?  In the vast majority of cases the buyer does not owe the bank any of the shortfall, however, in most cases the buyer has a bad credit score as a result of the short sale.  Better than a foreclosure but bad none the less. 

Prior to a new law moving its way through the system (I think it is finally in effect – consult with your accountant for details) buyer’s that shorted a bank on a sale would owe tax to the IRS and state on the amount of money forgiven.  In the example above the buyer would have owed income tax on an additional $190,000 of income. 

Warren Carreiro, Broker

Marin County Real Estate
Homes You Love. Advice You Trust TM

What does a Fed cut mean?

Wednesday, January 23rd, 2008

Crazy market.  Below is commentary on what exactly is happening when the “Fed cuts rates.”

Yesterday’s Fed move caused folks to think back on what Fed Funds really are. Remember that “Fed Funds” is the rate that banks can borrow money from each other to keep their reserve amounts in line.  This is a one day, or overnight rate. The “Discount Rate” is the interest rate at which an eligible financial institution may borrow funds directly from the Federal Reserve when their reserves dip below the reserve requirement. The Discount Rate is considered the last resort for banks, which usually borrow from each other. The Federal Reserve can change either, but they can’t change mortgage rates. If a borrower asks you why their mortgage lock doesn’t drop .75%, here is the simplest answer.  Moves in overnight rates aren’t directly linked to mortgage rates.  They set the stage for lower rates, but usually weeks down the road.  I like to use the analogy of steering our economy with steering a huge tanker in the ocean.  If the captain of a big tanker wants to make a left, he turns the wheel a mile or so in advance.  Same thing with the economy.  Corrections made now usually do not manifest themselves for a month or two.

Mortgage rates are dependent upon many more complicated factors than the Fed raising or lowering them. The supply of mortgages, the demand by investors for them, the value of the servicing, the credit quality of the borrower, etc. all factor into mortgage rate.

Here is something to consider.  Yesterday’s stock market opened in a free fall.  The Fed had to make an emergency cut announcement to stop/avoid a stock market collapse.  The “stock market” liked the move, came back in the end, and only closed around 128 points down in the Dow.  Now here is the thing…If the Fed did not cut the Fed Funds rate and Discount Rate, our mortgage rates would have been lower.  A simple rule of thumb is if the stock market is up, rates can be up.  If the stock market is down, rates usually follow.  So, what do you think might happen if the Fed cuts again at next weeks meeting?  If the stock market perceives the cut as a good thing and goes up do rates follow?

For those “students of the game” who are still reading, you may wish to check out the links below. may be a help to you.

Also check out

The above was written by Chris Weber of Residential Pacific Mortgage.  Chris may be contacted at
Warren Carreiro, Broker

Do not refinance your home!

Tuesday, December 4th, 2007

 If you are up-side-down on your home (owe more than it is worth) and are considering foreclosure or a short sale you need to know the ramification each option has.

If you purchased your California home in the past couple of years with 100% financing and the home is worth less than your purchase price foreclosure may be your best option.  This may also only be true if you have NOT refinanced your home.  You see, in California, in a foreclosure the bank has no recourse on your assets beyond your home (original purchase money only- does not apply to refinanced property).  So if you want to walk from the house -give it back to the bank, the hit you take is on your credit rating for seven years.

Option 2 might be to sell your property and ask the bank to forgive the difference between your loan and sells price.  Even if the bank will not forgive you the difference this is called a short sale.  In a short sale your credit is not hit as bad as a foreclosure.  However, the bank will likely come after your other assets AND (this is a big one) the IRS will tax you on any amount forgiven by your lender.  Don’t forget when the IRS wants your money they get it.

If you want to refinance your property to keep the payments low that will be hard to do at 100% financing and it may take away the best foreclosure on original purchase money has to offer.

Because this subject has such legal and financial ramifications if this article applies to your situation get professional legal (attorney) and financial (CPA) advice.
Warren Carreiro

Marin County August 2007 Sales Stats

Friday, September 7th, 2007

I’ve had the sales stats prepared for publishing on my Blog but I kept holding off on releasing them.  The numbers don’t look bad, sales are down, but that is not the issue.  When the market is rapidly changing the stats lag and don’t tell the real story. As a Marin REALTOR, I can tell you what you already know; Marin real estate sales are slow. 

In some areas prices are taking a hit.  Novato entry level homes are sitting on the market.  The banks actually require buyers to qualify for loans, what a novel idea.  If you have a good down payment and credit, loans are available at decent rates.  The most expensive loans are fixed rate, 30 year Jumbo (over $417,000).  If you go with a five or seven year fixed rate loan rates are very competitive.

Where are home prices going in Marin?  Like everyone else I don’t have a crystal ball but I can say that in the past forty years the average sales price in Marin (based on MLS) has increased in all but two years, 1991 and 1992.  That drop in average sales prices was less than 3%.  What other California counties have that type of stable price history?

August 2007

Marin Median Price                       $940,000

Median Days on Market                56

Number of Sales                            223

August 2006

Marin Median Price                       $890,000

Median Days on Market                50

Number of Sales                           300

A few things about these numbers; one month is too short a time period to see the whole picture and they also don’t take into account the sales (which have not closed yet) since the mortgage mess hit the fan.  It is a buyer’s market, and buyers are finding some good deals. 

Warren Carreiro, Broker

Marin County Real Estate


The Changing Loan Market

Monday, October 9th, 2006

I asked a loan broker I use, Chris Weber of First Security Loan 415-209-7622 to give us an update on the changing loan market and this is what he had to say.

Not too long ago conservative buyers would finance the purchase of their new homes with a 30-year fixed. Usually this was the loan of choice for really well qualified buyers who intended on keeping the property for a long time. But, not everyone is considered a really well qualified buyer in the Lenders eyes. Nor did everyone feel like they needed, or wanted to pay for the security of a 30-year fixed. For these buyers there were many different options to choose from.
Many first conversations with new clients began with the fact that they were referred to me was because I was so creative. I would be able to create the right loan program and payment to meet their specific needs.
Lately the market has changed. We are experiencing a tighter market, meaning property values have leveled or may still be dropping, and interest rates are rising. In this new, tighter market we have experienced some changes in the lending market. The first change is in the interest rates themselves. For the past few years the Fed has been trying to slow the economy by slow raising interest rates. The only rate the Fed actually controls is the discount rate, the interest rate banks lend each other money overnight. This the shortest of the short term rates. The premise is the trickle down effect. Slowly the short term rate increases (adjustable loans) will create long term rate increases (fixed rate loans). Interest rates will rise and inflation will be kept at bay.
The short term adjustable interest rates did rise, but a rate much faster than the long term fixed rates. At one time short term interest rates, i.e. the 5-year fixed, or 7-year fixed loan programs were higher than the 30-year fixed. All of a sudden creativity was of no value if it produced a higher interest rate and payment.
The latest change in the market is the margin between the short term rates and the long term rates has widened again. Now the savings of a 5-year fixed over a 30-year fixed is worth the risk of what could happen to the interest rate when it adjusts five years from now.
But, a new challenge has surfaced. Lenders are taking a harder look at how they assess risk. In interest rate pricing risk equals price: The higher the risk, the higher the interest rate. One of ways the Lenders are reducing risk is by reducing their qualification ratios. This is a calculation to determine a buyers total monthly debts, including their new home costs as a percentage of their income. Another way is by reserving the best pricing for higher credit scores, or perhaps for buyers with large down payments. Another component of risk in the Lenders eyes is the loan program itself. Lenders feel there is less risk in a fixed loan than an adjustable. Some Lenders will allow you to carry higher ratios if your loan payment is fixed. Now, sometimes buyers who do not qualify for a lower rate adjustable will be approved on a 30-year fixed loan. My most creative approach is the most conservative loan.

Marin County Real Estate Contingent Offers

Thursday, August 24th, 2006

Sellers accepting Contingent Offers is catching on but still represents a small portion of homes in escrow.
Currently, there are 159 homes in escrow (this does not include homes that have gone Pending all contingencies removed because MLS does not identify Contingent Offers for this group). Of those 15 are Contingent Release.
What this means is the home is in escrow and one of the conditions of closing is the buyers current home must sell first. There are lots of variation on how this can be written but typically after a couple of weeks the seller can accept a new offer kicking the current buyer out of escrow. Of course the original buyer gets a 72 hour notice and can remove the contingency but usually if they could it would not be there in the first place.
The strongest Contingent Offer to make is when the home you are selling is in escrow and you are just waiting for it to close. Other times to use it is when the home you are buying has been sitting on the market for a long time, the seller is extra motivated, or your offer price seems just right.
If the buyers home is priced correctly and in a price range/area that sells fast this type of offer may be considered as less risky.

Are prices going to drop, should I wait to buy?

Sunday, April 2nd, 2006

I have had a couple of clients mention they are waiting for prices of Real Estate in Marin County to drop before they purchase a home. For a while, the newspaper headlines warned the sky was falling but now the consensus seems to be there will be a soft landing from the rapid housing appreciation.
Looking back at the 41-year history of average Marin County Real Estate prices reported in BARIES MLS there have been two years when prices were lower than the previous year. In both these instances the drops were relatively small; under two percent.
Remember though, historically the odds are not leaning to prices dropping. After all, two years of pricereductions and thirty eight of increases means 95% of the time Marin prices have increase year over year.
When we consider interest rates, the argument to wait makes even less sense. Lets say on this $850,000 home we have a 20% down payment that leaves us with a $680,000 loan. 30-year payments at the current rate of 6.5% are $4,298. If rates go to 7.5% (which historically is more likely than a price drop) the payments are $4,755.
One question you have to ask is, have the people who think prices are going to drop sold their homes? Most likely not.?