Connecticut Real Estate Blog - Real Real Estate in CT

1. Mortgage Lenders/Brokers Don’t Owe Any Fiduciary Responsibilities to Borrowers

A fiduciary is one who acts legally on behalf and in the best interests of another. Realtors are required ethically and legally to act as fiduciaries for their clients.  Examples of Realtor fiduciary responsibilities are: Disclosure; Reasonable Care; Loyalty and Obedience, just to name a few of them.  Unlike Realtors, mortgage lenders and brokers are under no obligation, legally or professionally to look out for your best interests.  If a lender does not do CHFA loans, he/she is under no obligation to tell you about CHFA, as an example. 

2. Don’t Count on Rate Quotes to Be Accurate

If you’re calling around or surfing the net for the best rates, there are three hazards. First, rates can change throughout the day so unless you are looking at the same time, comparing rates will be inaccurate.  Secondly, lenders may purposely give you a low rate quote knowing that you’re not going to lock in right that minute. Surprise, when you are ready to lock in, the rate has gone up.  Thirdly, you are not locked in until you lock in - so your rate will probably change.  

3. Your Realtor Knows the Best (and the Worst) Lenders

Realtors get to know lenders very well.  We know whether they return calls, whether their staff has a history of closing transactions on time and whether or not they have a reputation for delivering a high level of service.  If your Realtor hasn’t personally worked with a particular lender, he/she has probably heard something about their company.  And if not, you may want to consider talking with another lender and at least compare what the two lenders told you.

4. Pre-approvals Are Not Created Equally

Your lender says you were pre-approved but pre-approved does not mean the same thing at every lender.  Did the lender pull your credit report?  Did you provide the lender with pay stubs, W-2s, bank statements and 401(k) statements?  Does your letter specify the amount, interest rate and date?  Has your lender put your application through Desktop Underwriting?  

5. Your Interest Rate May Not Be Locked

If you’ve obtained a pre-approval from a lender, you may not be locked-in at the rate your pre-approval is valid for.  Locking in a rate generally includes a separate signed agreement with the lender and possibly a payment of some fee.  Without the lock-in, you are taking your chances that interest rates may go up, impacting your ability to qualify for your mortgage.  For more information on locking in rates, go to HSH.com.

My office hosted a luncheon today with Bill McCue of McCue Mortgage.  Mr. McCue, in the mortgage business for longer than I’ve been alive, had a lot to say about the mortgage mess we find ourselves in. 

In case you’ve been in a hole for the last year, the mortgage mess is as follows:  No or low down payment loans almost non-existent, no subprime loans, no stated income loans and increasingly stringent credit and income guidelines coupled with increases in rates of foreclosures/defaults/short sales and housing prices on the decline nationwide.  A big pot of yuck.

If you’ve scratched your head in wonderment then I have some answers, thanks in part to Mr. McCue.  Caveat for you economists out there - this is a simple man’s explanation.  I am only a Realtor, after all

A long time ago, if you wanted to buy a home, you went to your local bank.  You opened up an account (or already had one) and a local loan officer qualified you for a mortgage.  Unless you were borrowing money through FHA or VA, which guaranteed loans in the event you defaulted, banks wanted to ensure you did not default and you had to meet pretty stringent guidelines.

This was back in the days of double digit interest rates, when you needed 20% for a down payment, and your qualification was entirely dependent upon your ability to repay.  Home ownership rates were lower than they are today - 62% in the 1970s and around 64% in the 1980.

In the early 1980s, it became legal for banks to charge higher fees and offer variable and balloon type mortgages, which they offered to subprime borrowers.  However, the market for subprime loans was still a small percentage of the marketplace. 

From a paper by the Federal Reserve Bank of Dallas,

Traditionally, banks made prime mortgages funded with deposits from savers. By the 1980s and 1990s, the need for deposits had eased as mortgage lenders created a new way for funds to flow from savers and investors to prime borrowers through government-sponsored enterprises(GSE).

Fannie Mae and Freddie Mac are the largest GSEs, with Ginnie Mae being smaller. These enterprises guarantee the loans and pool large groups of them into RMBS (residential mortgage backed securities). They’re then sold to investors, who receive a share of the payments on the underlying mortgages. Because the GSEs are federally chartered, investors perceive an implicit government guarantee of them. Fannie Mae and Freddie Mac, however, haven’t packaged many nonprime mortgages into RMBS.

Lacking the same perceived status, nonagency RMBS—those not issued by Fannie Mae, Freddie Mac and Ginnie Mae—faced the hurdle of paying investors extremely large premiums to compensate them for high default risk. These high costs would have pushed nonprime interest rates to levels outside the reach of targeted borrowers.

This is where financial innovations came into play. Some—like collateralized debt obligations (CDOs), a common RMBS derivative—were designed to protect investors in nonagency securities against default losses. Such CDOs divide the streams of income that flow from the underlying mortgages into tranches that absorb default losses according to a preset priority.

Having confidence in the ability of quantitative models to accurately measure nonprime default risk, a brisk market emerged for securities backed by nonprime loans.

From the St Louis Federal Reserve Bank,

In addition to changes in the law, market changes also contributed to the growth and maturation of subprime loans. In 1994, for example, interest rates increased and the volume of originations in the prime market dropped. Mortgage brokers and mortgage companies responded by looking to the subprime market to maintain volume.

The growth through the mid-1990s was funded by issuing mortgage-backed securities (MBS, which are sometimes also referred to as private label or as asset-backed securities [ABS]).

In part because mortgage lenders were not going to hold the mortgages they wrote, credit standards began to loosen. 

Beginning around 2000, several other things began to happen that broadened the impact of subprime mortgages.

• Interest rates were low, caused in part by the dot com bust
• Home prices began to tick upward
• The ranks of lenders and Realtors began to swell with amateurs flooding the business who did not know how (or chose not to) counsel clients on wise financial decisions
• Homes became investments, not a place you can raise your kids (lost money on your Pets.com stock? Don’t worry, you can park your money away safely in real estate!)
• The availability of home equity loans enticed many people to spend their home equity on purchases

And like a snowball rolling down a hill…

• Subprime borrowers are defaulting at a higher rate, causing an increase in foreclosures & short sales on the market, depressing real estate prices
• Prime borrowers are affected by depressed home prices when they have to sell or refinance, causing some to default or do short sales
• Credit is tight, locking out buyers who could buy the excess inventory
• Interest rates are likely to rise because of inflation further depressing real estate prices

South Windsor Real Estate Market Statistics

South Windsor is still technically experiencing a seller’s market in condominiums and a slower more balanced market in single family homes.

Single Families

• Average List Price: $404,335
• Average Sales Price: $336,284
• Active Listings: 66
• Closed Listings in Last 6 Months: 68
• Months of Inventory: 6 or Balanced Market
  

Condominiums

• Average List Price: $258,348
• Average Sales Price: $197,812
• Active Listings: 33
• Closed Listings in Last 6 Months: 67
• Months of Inventory: 2.9 or Seller’s Market
  

Rocky Hill Real Estate Market Statistics

Rocky Hill is experiencing both a seller’s and balanced market, depending on whether you are selling a single family home or condominium.

Single Families

• Average List Price: $362,573
• Average Sales Price: $308,716
• Active Listings: 43
• Closed Listings in Last 6 Months:   32
• Months of Inventory:   8 or Buyer’s Market

Condominiums

• Average List Price: $227,250
• Average Sales Price: $211,355
• Active Listings:  30
• Closed Listings in Last 6 Months:   49
• Months of Inventory:  3.7 or Balanced Market

Hartford County Real Estate Market Statistics

In summary, the overall number of single family sales are down in March 2008 from March 2007 but are up compared to February 2008. The median sales price is stable compared to March 2007 at $249,900.  The average days on market is also up slightly to 67 days compared to 64 in March 2007.

Median Sales Price in March 2008 - $249,900
420 Sales
67 Average Days on Market

Median Sales Price in March 2007 - $249,000
635 Sales
64 Average Days on Market

Median Sales Price February 2008  - $247,000
328 Sales
75 Average Days on Market

Median Sales Price February 2007 - $244,000 
459 Sales
73 Average Days on Market

Sales price is just one method used to analyze the market.  Another is the Absorption Rate, or how long it will take to sell all the homes currently on the market based on what’s happened in recent history.

In all of Hartford County, there is 8 months of single family inventory. 

Or in the last three months, 1103 homes sold, or about 368 homes per month sold.   Currently, there are 2948 homes on the market and assuming that about 368 homes will sell per month, it would take 8 months to sell the current inventory (Or 1103/3=368, then 2948/368=8, the estimated number of months it will take for a home to sell).

Generally, it is considered to be a seller’s market when there is less than 3 months inventory on the market.  3-6 months of inventory is considered normal or balanced, while anything above 6 months is considered to be a buyer’s market. 

The linchpin of the Multiple Listing Service is real estate brokers cooperating with each other to facilitate the sale and purchase of real estate.  One way in which agents cooperate is feedback.

When a home is placed on the market, listing agents request that all agents showing the property give them feedback on the price, condition, and interest of the buyers. 

Earlier this week, I was filling out one of a dozen feedback forms for showings I did over the weekend and it occurred to me that I was being less than truthful.  Why?  Don’t I want to help other agents help sell their listings?  Don’t I want to cooperate?

Rewind to a four years ago.  As a new agent, I made negative feedback comments to a listing agent about a home.  My clients later decided to put in an offer on the home.  Later on, I discovered the listing agent had shared my comments with the seller and the seller was offended (she printed them out, which seems much worse than just repeating).  I knew he was offended because he called me. 

The deal eventually fell apart and I suspect there was a lot of lingering resentment about my comments.

The comments were dead on - and I thought I was helping the listing agent.  Here is where I learn one of the great universal truths - some people don’t want my help.

From then on, I stopped giving really honest feedback.  From the home seller’s ”adult” collection in the office or a bong on the living room coffee table to the really amateur faux paint finish on every surface, specific matters of taste that can impact the sale of the home are left out of my comments.

I doubt I am the only agent to refuse to give meaningful feedback comments. If you are getting really specific and meanigful feedback, it’s probably because the buyer agents knows the listing agent (and knows hurtful comments won’t be shared) or the buyer agent hasn’t had a bad experience like mine.

Because of this, I caution every home seller to not count on agent feedback to guide in making decisions.