As both tipsters and readers alike have noted, as of next month a major private mortgage insurer will no longer write coverage for condominiums in “declining” markets. And as far as AIG United Guaranty is concerned, that includes San Francisco. Yes, proper.
[S]tarting May 1, AIG United Guaranty…no longer will write coverage on condominiums in hundreds of ZIP codes across the country that it designates as having “declining” market conditions. The ban is irrespective of applicants’ credit scores, assets or equity stakes. Even in the healthiest real estate markets, United Guaranty will require buyers to put at least a 10 percent down payment into the deal, and will reject applications on units in condo projects where more than 30 percent of the owners are investors.
Of course AIG is but one insurer. And over the past seven years or so an increasing number of condo buyers turned to piggyback mortgages to avoid PMI altogether. But with ever tightening lending standards, and increasing rates for second mortgages, we just might see a resurgence in use throughout San Francisco. Then again, if other insurers follow suit, perhaps not.
∙ Condo-loan restrictions tightening [Baltimore Sun]
∙ AIG United Guaranty’s Declining Markets List (pdf) [ugcorp.com]
Is there any place in CA that is not in these Zip Codes? Why not save paper (even virtual) and just say: we’re out of CA altogether?
Actually, sanfronzi, that is kind of what they say. They are keying on declines in MSAs and listing the zip codes only as a convenience for the underwriters. They don’t know nor do they care about the difference between Bayview zip codes and Pac Heights zip codes. If the zip is in the declining SF/SanMateo/RedwoodCity MSA, then all will be treated the same…
Geez, that’s a stake through the heart of this market, if I ever saw one.
If other insurers follow suit, within a week, the cost of getting a second mortgage will be up by 30%, and in two months, every condo in town that is priced more than 10% over the conforming jumbo limit will have to be repriced, putting downward pressure on the lower priced ones to stay competitive.
Wow. Just wow.
I think that Bishop and Mammoth are not on their list. Probably an oversight because they don’t seem to like Nevada or Tahoe either.
So how many changes to underwriting requirements, declining sales volume, job losses, and on and on will it take before Pac. Heights cracks?
Anyone venture a guess?
I give up.
Yeah, they just took all the Zipcodes. I can even see SF POBox Zip codes and I don’t think they’re relevant, are they?
I don’t know if it’s a stake thru the heart of the market, but it’s an extra wave around the sand castle. Eroding the edifice little by little. The towers are still holding, but for how long?
… and the pendulum swings to the other extreme
“… and the pendulum swings to the other extreme”
Not even close. It takes time to correct the 200 to 300% price increase that took place between 1997 and 2007. Salaries haven’t increased by that much and since the majority of San Franciscans are renters, the distortion between pay/rents/home prices is greater than ever before.
I think this pendulum just got released at its high point. Stricter lending, foreclosure waves, negative equity, risk aversion are the gravitation forces that pull this baby down and they haven’t yet hit us full force.
I’d be interested to know how many buyers in the City of San Francisco actually purchase with PMI? I personally did not, nor did any of my friends and we all are “entry level” (for SF, lol) type buyers. Thanks.
It doesn’t matter Ramsey, because when the mortgage packagers of second mortgages go to try to sell those seconds, the investors will now look at this list of zip codes and ask if there are any loans in the pool in those zip codes.
If there are, the investors will just say, “um, no thanks” or “I want triple the interest rate to compensate me for lending to a property in a zip code on the ‘list of death'”.
When your friends bought, the investors all assumed prices were heading to the sky, and the slight extra interest rate for being second in line they were getting was just free money. Now, as foreclosures mount and the holders of the second mortgages walk away with squat, they have “reevaluated” that position.
The market appears to be getting tighter by the hour. What happened last month or even this morning is of little relevance.
Some of those Zips haven’t declined one tiny bit. Oh well. Leave it to the suits.
What’s ironic is that everyone getting loans right now actually can afford them, and it’s typically enough capital these days to obviate a need for a second.
The pendulum I’m referring to is the lending standards.
Lending standards are actually going where they should, notwithstanding the fact that some insurers/lenders are putting temporary extra restraints the time the market corrects itself.
Once all the blood has been shed, they’ll revert to looser practices. I hope not back to the crazy Option-ARMs No-Docs/No-Job that fueled the 2004-2006 bubble top.
A home loan should be:
15-20 year loans.
30 year is actually a “convenience/revenue-making product” pushed by the banking industry to “increase solvency/bleed them more” borrowers. Many industrial countries are still within 15-20 years.
A 30-year mortgage done today will seldom go to full payment and over 5 years you’ll have paid less than 6% in principal, and 14% over 10 years. A 30% mortgage is more a financial leverage instrument, not so much a “house buying” one. You’ll build way more equity in the first 10 years with the appreciation than the principal payments and this is the goal of many.
20% minimum down payment.
Yes this means saving when you’re in your early 20s, living under your means even if it’s so uncool. $4000 LCD HD TVs are for rich people except if you’re ready to pay $6000+ for it on credit.
Standard amortization.
Interest only and Negative amortization are a good way to stick it up to the Joneses and show them you can get a bigger home. For a few years. But ultimately the Joneses always win if they have more income and equity. A friend played the testosterone game with his neighbor but couldn’t fight against a very deep-pocketed guy. He’s now upside down 40% but he has a kick-ass deck and hot tub to show for it.
Interest only is a world away from negative amortization, and has nothing to do with testosterone. Many buyers have incomes that have been increasing and are likely to continue to do so. Interest only loans make perfect sense if incomes are rising. There should be plenty of extra conditions and interest issues with such loans, but if you and your lender are comfortable with it then why not? Thirty year mortgages and ten percent down payments were also around for a long time before this bubble happened. The idea that very old style lending translates to 20 year olds saving even though it is not cool is stupid and obnoxious. Simply getting appraisals under control would make a world of difference. Ten percent down is not at all like no down, and interest only is not at all like negative amortization. What matters is what works, not what matches ideological rhetoric. Sloppy math is hard thinking never helps anyone.
Mole Man,
So many things wrong with your post, I don’t know where to start.
Where were you in the last 12 months? It was the relaxed lending practices you are promoting that brought us exactly there.
0% financing is OK
If you “give the choice” of interest only, people who want to do amortize get mechanically priced out of the places that the “interest only” crowd are buying. In an up market you’ll stretch all the way to the breaking point because prices will presumably bail out any mishap. We’re in a culture of “positive” thinking which is great in good times but a bit like “lemmings going off the cliff” in down times. But it looks like Darwin is doing its job these days…
Many buyers have incomes that have been increasing and are likely to continue to do so
For 15-20% of the people yes. But for the immense majority, it actually decreased since 1998.
Interest only loans make perfect sense if incomes are rising
Taxwise? I never understood the rationale behind paying as much interest as you can just for the tax break. I was raised in a culture that says “Debt is a necessary evil. Cash is king. Spend less than you earn.” You know, responsible life lessons. Not like the “debt is the solution to your personal shortcomings” mantra. Debt is slavery.
The idea that very old style lending translates to 20 year olds saving even though it is not cool is stupid and obnoxious
20-year olds should be saving. They have to build the future and only so much future can be built with debt. Two brother friends got an inheritance 10 years ago. They were in their mid-20s. One blew everything in gadgets like jet skis, fun games, the other one use the money for downpayments for rental properties. Guess who has a jet ski and fun today? This country used to be built on hard work and entepreneurship. Now it’s borrow and spend and hope the Chinese still buy our debt (by the way, they’re now buying Euros).
Do you know what’s stupid and obnoxious? Someone who will tell young people that life is easy and that Santa Claus will always be there to bail them out. Not only obnoxious but also dangerous. What’s more obnoxious is people who get paid doing that.
Sloppy math is hard thinking never helps anyone
What sloppy math? any issues with my numbers?
If by “helping” you mean help people borrow more than they can afford, that’s pretty sloppy economics.
You lose your chances at a repeat customer when you bleed them dry.
Are you a Realtor?
Oops first title was supposed to say “interest only financing is OK”
Since you keep asking people if they are realtors, I’ll bite. What do you do for a living? Are you a hobbyist? Banker? Trader? Economist? In the market? Why the constant broad strokes?
10% down needed and no more than 30% of the buyers can be investors…BIG DEAL. Where’s the beef?
This is just the tip of the iceberg. Besides the fact that MI companies will not insure condos in declining markets, there has been a substantial shift in the way condominium underwriting is handled by Fannie Mae and Freddie Mac. THIS IS THE BIGGER NEWS.
By shifting the burden of “project approval” to the lender, smaller firms will opt out of condo lending completely because they don’t have the staff or cost structure to support the additional work required, and those lenders that do will likely increase fees to cover these costs and the potential losses they may incur if they can’t “sell the loan” to Fannie or Freddie.
TRANSLATION – Higher mortgage rates for condominium loans.
From the Baltimore Sun article – “Under Fannie Mae’s changes, most of the due-diligence research on condominium projects’ key characteristics — their legal documentation, the adequacy of condo association operating budgets, percentage of unit owners who are late on association-fee payments, percentage of space allocated to commercial use, and percentage of units owned by investors — must now be performed up front by loan officers.”
“Not only is this time-consuming and costly, but under the new procedures, Fannie Mae expects the lender to warrant the accuracy of its research. Some condo-project legal documents run into hundreds of pages, yet lenders are supposed to take legal and financial responsibility for their accuracy.”
“Fannie Mae spokeswoman Marilyn Kornfeld said the new procedures are designed to “protect borrowers and manage increased credit risk in the market.” Freddie Mac spokesman Brad German acknowledged that the changes would make condo-unit loans “more labor and paper intensive for the lender,” but said weak sales, growing numbers of financially troubled projects and declining property values made them necessary.”
It will be interesting to see how this plays out with so many new buildings on the market and projects that are in the process of closing. Without a market for second loans and no PMI, you gotta have that 20% AND all the rest.
It’s hard for me to see how this won’t exert a fairly heavy downward pressure on condo prices in the next few months.
Am I missing something?
@ risk being called an idiot, I am all for shameless optimism and survival of the smartest.
let those with ever increasing incomes to tale bigger risks, since that is most likely how they got there in the first place!
let those with the pesimism of the last to be picked for a team to self doubt and fullfill their own gloom and doom.
I say in 10 yrs we will say “damn, I should have bought more!”
fluj,
I am just an rental apartment investor with a few good years under my belt who knows a good deal when he sees one. And so far, this city offers none. It is exceedingly overpriced and is due for a strong correction. I might jump in when the time is right, or I might go to the Great 2010 Florida Condo Fire Sale. At least Miami has nice weather.
What I’m exposing is just my opinion. I believe Real Estate has been overused as an investment vehicle and a way to easy riches. And I see the obvious conflicts of interest that plague this industry and it makes me want to laugh. I type what I think instead. Got any problem with that?
As far as my distrust of Realtors, I believe no one is there to defend the buyer but the buyer himself, and especially NOT Realtors. Come on, the bigger the smile, the deeper the… well, you know what I mean.
Realtors blew into this bubble and the lenders provided the soap. And none of them actually built the house.
dotcomer,
Agreed, people who take risks get more reward. 100% true.
But there are times when you have to accept the time is not right, except if you can double down every year or you want to make a point like the guy who bought 2845 Broadway, build an empty shell castle and has been trying to unload it for 65M for 2 years. The guy has $1.6B in net worth and all of this is probably just an ego trip. Even The Donald shaved off 25M from his Florida mansion.
Individual retail investors cannot afford to make one bad move, because they probably are at the limit of capacity. Different game, one chip to play. I wouldn’t jeopardize my future on the bet that SF is separated from the whole rest of the civilized world.
Buy low, sell high.
OK fronzarelli, I’ll accede you some spoken of experience I know nothing about. But you have lost me, personally, with some of your overstatements. In plain point of fact I think you have made statements that show a lack of understanding regarding this town’s micro-markets. Over and over again. You lerched over to try to include Glen Park as an example of some sort of collapse one time. You bring up a bank owned 6th and Market likely protected tenant occupied building as an example of what rent “should be” around here. I just don’t buy it. Or that part of what you are selling, not for a sec. You need to bone up on SF, man. People around here do their homework.
I didn’t mean to say rent, but sales price “should be.” Your categorization of the Valencia and Mission streets area was pointedly off. I’m just not buying it, dude. You obviously have R.E. experience. You have none around here, and it’s plain as day.
fluj,
I have seen enough of the market in my 2 years in this town to see prices have a “hope” factor and is full of hot air.
If you re-read some of my posts, you should know enough of my experience. I have been an investor in a city as gorgeous as SF with way more international investors, gazillionaires and such. Today reminds me of my first purchase. It was 1994 , markets had been frozen for 3 years and the seller had advertised his condo at 10% under market price. I jumped on and even shaved the price by another 2% and free rugs.
1997, second purchase. Similar unit. Same building. 60+% discount in $/sf. The bubble has collapsed. Let the shopping begin. The good times lasted 5 years until the lemmings started rushin towards the cliff again.
The conditions in 1994 look similar to now: Realtors and sellers lived in the past and had no sales. There was strong distrust in the professionals who had pushed things beyond what the real world could take. They held for a few years thanks to savings or help from the banks. Then they had to drop the prices. Still no buyers. The credibility gap took years to mend.
Things change, get used to it. Even good markets. And SF is not isolated from the rest of the state/country.
But Market cheerleaders are sure giving a last nice fight! It’s probably one of their last bastions.
Then again, as I always say, I could be wrong.
Don’t tell me what to do, pal. Figure out the town first. Then talk to me.
Fluj, personally you and Fronzi are valued contributors to the site, and I enjoy reading both of you, but I dont see where he is telling you what to do here. You asked him: He answered you. You should respond in kind or not at all. Snide comments dont add to the debate.
fluj, I understand your frustration. And if you don’t want to talk to me, just stop responding. It’s as easy as that.
Actually, he told me “things change. Get used to it.” It’s pretty tough to separate the wheat from the chaff with Arthur Fonzarelli. He’s had some valuable experience and can offer some insight, I agree. But he continually stretches to try to to talk about various neighborhoods in SF and it’s not credible.
Where were you in the last 12 months? It was the relaxed lending practices you are promoting that brought us exactly there.
This is a grotesque fabrication. Back in the dark days of the early to mid nineties when subprime was first rolled out everything was completely different. Conservatives and bankers put huge pressure on regulators to open up new markets. People could get subprime loans, but they had to demonstrate the ability to pay with a big down payment, significant reserves, a good credit rating, and a thorough examination of their financial status. The result was that buy doing more dilligence and charging more interest an entire new market was created. Subprime loans in the early days were very conservative in their execution, highly profitable, and enabled a new group of people to own. Default rates remained low until everything went out of control with bogus appraisals and much more aggressive zero down lending. Things got really bad after 2003, but somehow the nearly ten years of subprime mostly working out well for people aren’t interesting anymore. How sad. What was seen in the last twelve months was the flame out and had very little in common with the subprime products that were originally rolled out and did well.
If you “give the choice” of interest only, people who want to do amortize get mechanically priced out of the places that the “interest only” crowd are buying.
That is capitalism. The people who use interest only loans are paying more and both they and their lenders are taking on greater risk. What has typically happened in the past is that traditional loans get made and others do not with the result that people who would go for the risky loans are locked out and simply do not buy.
In an up market you’ll stretch all the way to the breaking point because prices will presumably bail out any mishap. We’re in a culture of “positive” thinking which is great in good times but a bit like “lemmings going off the cliff” in down times. But it looks like Darwin is doing its job these days…
This is just sloppy projection. When lending standards went out the window, sure things were bad. When I got my I/O loan in the mid nineties I did it because I knew property markets were blood sport. I overpaid consistently and then refinanced with a 15 year loan and am quickly approaching full ownership of my home. Did I somehow fail to correctly read your script?
I never understood the rationale behind paying as much interest as you can just for the tax break. I was raised in a culture that says “Debt is a necessary evil. Cash is king. Spend less than you earn.” You know, responsible life lessons. Not like the “debt is the solution to your personal shortcomings” mantra. Debt is slavery.
Again, this is just projection. I used an I/O loan to buy more than I could otherwise afford to at a market bottom, then paid off the loan quickly. The money that I saved by buying when I did saved more than the interest of the I/O loan cost during the period that I held it. It sounds like I am working with risk and markets and you are exclusively in the domain of debt religion.
20-year olds should be saving. They have to build the future and only so much future can be built with debt.
This is true, but not relevant to the lending being discussed. The way I got my I/O loan was by saving enough for a down payment, a reserve, fees, and finishes and furnishings for when I moved in. I survived my I/O loan by always overpaying it and refinancing with a 15 year fixed rate when after a short time my income multiplied and interest rates were set unreasonably low by Greensplurge.
Your experience with brother friends blowing an inheritance is common enough, but my experience of playing the property game to win is not that uncommon either.
What sloppy math? any issues with my numbers?
Let’s start with your 20% down figure. This is a good general stake, but when lenders and borrowers are willing take half that in exchange for substantially higher rates I don’t see how that leads into any kind of spiral of bad loans. Make sure they have the money, make sure they have reserves, make sure all fees are going to be paid, make sure the house will be the primary residence, and get an appraisal that isn’t junk. All of this kind of thing used to be considered due dilligence.
Zero down and 10% down are worlds apart. Interest only and flexible payment negative amortization schemes are worlds apart. Reasonable dilligence and what has been going on in lending since 2003 at least are worlds apart. Forcing a 20% rule or anything else ignores the sources of the problems and makes things worse by taking control and options away from lenders.
Are you a Realtor?
Mathematician, Software developer, and writer. Property markets have been an obsession of mine ever since the chaos of 1980, but I have no stake in the industry like you do.
“That is capitalism. The people who use interest only loans are paying more and both they and their lenders are taking on greater risk…”
Except when IO loan holders default after realizing that they are now seriously under water. That’s not capitalism, its gaming the system to your benefit.
I have no problem with risk takers reaping the rewards when they choose a winning strategy. But they also should be taking their lumps as well.
It is not fair to keep the benefits of a risky strategy but pawn off the liabilities onto the taxpayer when you’re dealt a bad hand.
Mole Man.
Thanks for the point-to-point response. Very insightful.
You bought in the mid-90s? I did too for rental properties and went on buying for a few good years. I didn’t leverage that much (50% downs) on all the deals but the entry points were so dirt low that this didn’t matter that much. My goal was to have the rents cover 150% of the loan, and that’s what I got. The renters paid off my loans. Today’s 50-70% rent/mortgage is ridiculously low. You pay people to live in your place, you pay all the costs and they have rent control.
I just took a safer road and know I could have leveraged 3 times more. What I didn’t make in missed opportunity I gained by sleeping better at night. I don’t look back that much, or only to enjoy the great ride it was as I did profit from other people’s leverage when I sold 80% of the rentals I had.
I try to be very disciplined as an investor. Call it religious, sure, why not.
I think I/O loans are only for the educated crowd. Marketing it to everyone was a mistake. Mix this with no-docs and you get a recipy for a bubble.
You used leverage and got into a market where not only you could afford to buy, but you also NOT afford NOT to buy. Today is different. Banks are looking for safety, and they should. I/O and zero down would be reckless today.
But cash will always be king.
Things do change. Buying rental properties has been a losing proposition for some time now. The only upside in the last 5 years has been the “appreciation” of the property because cash-flow has been negative for some time now. Since appreciatio is not something you can count on, most buildings for sale will now have to be more in line with at least neutral cash-flow. We’ll see if pricees adjust but I’m not sure that they will. This market has defied all sorts of logic for a long time now.
should have proofed by post, did not mean to use “for some time now” as much as I did.
True, buying rental properties is not interesting at this point.
BUT.
– TIC conversions are depleting the rental supply
(one of the reasons rent prices are going up)
– Sale prices are coming down.
Maybe times will be more favorable for rental property investors in the next 2-5 years.