Mortgage applications increasing

Despite a generally sluggish market, mortgage applications are rising, according to a report from the Mortgage Bankers Association. At the end of February, applications were up 8.8 percent over the same week a year ago.

Applications for mortgages to finance the purchase of a home increased 5.2 percent during the week ending February 23, compared to the previous week. Refinance mortgage applications increased 1.2 percent from the previous week. It appears the market is strengthening. The average interest rate for a 30-year fixed-rate mortgage lowered to 6.16 percent on March 1, down from 6.19 percent during the previous week, according to MBA. The average rate for a 15-year fixed-rate loan is down to 5.84 percent. These are rates for 80 percent LTV loans.

Existing-home sales rising

The number of existing-home sales in January rose significantly, reaching the highest level in seven months, according to a report from the National Association of Realtors. The increasing sales include single-family homes, town homes, condominiums and co-ops. The sales volume rose by 3.0 percent from the previous month, to a seasonally adjusted annual rate of 6.46 million units.

“Although we're expecting existing-home sales to gradually rise this year, and buyers are responding to the price correction, some unusually warm weather helped boost sales in January,” said David Lereah, NAR's chief economist. “On the flip side, the winter storms that disrupted so much of the country in February could negatively impact the housing market. These weather events are unusually large. Many transaction closings were postponed in February and home shopping was essentially shut down for about a week in many areas. We shouldn't be surprised to see a near-term sales dip, but that will be followed by a continuing recovery in home sales.”

Meanwhile, there was a drop in new-home sales during January, according to figures released by the U.S. Commerce Department. The sales pace declined 16.6 percent for the month, down 20 percent from a year ago. “The falloff in new-home sales reflects a return to more normal weather conditions, following the weather-related increase in sales late last year,” said David Seiders, chief economist for the National Association of Home Builders.

New mortgage-related legislation proposed

Newly proposed federal legislation would put the brakes on the growing trend of providing home loans to mortgage applicants using an Individual Taxpayer Identification Number instead of a Social Security number. ITINs are normally issued by the Internal Revenue Service to help immigrant workers who don't qualify for a Social Security number to report their income and pay federal taxes.

An increasing number of banks and other lenders have been offering home mortgages to undocumented immigrants using ITINs. The proposed bill, introduced by Rep. John Doolittle, would amend the Truth in Lending Act to make ITIN mortgage lending illegal.

Tough but potentially positive market for mortgage industry

It's tough to survive in today's mortgage lending industry. Many originators, particularly those that have been specializing in the subprime niche of the market, are folding their tents and silently leaving the business. But there's a bright side of that development for the mortgage industry and consumers.

“We're seeing 40 or 50 subprime companies a day throughout the country going down in one form or another,” said Angelo Mozilo, chief executive of Countrywide Financial. About two dozen large subprime mortgage lenders nationwide have gone under or stopped making loans, according to Implode-O-Meter, a Web site that tracks closures in the subprime lending industry.

The failure of so many subprime lenders is symptomatic of a larger trend – Wall Street's loss of appetite for risk, the site reported. With so many mortgages going bad, investment banks have quit backing subprime mortgages and are actually kicking bad loans back to some originating lenders, forcing some of them to close their business. One of the first mortgage products expected to disappear are zero-down mortgages, sometimes known as 80-20s. These are often structured without verification of income to borrowers with impaired credit ratings.

Many loan originators are going out of business during the first quarter of this year, it was reported by the “For Benefit of the Originator” (FBO) association. This could be a positive development for the business generally, they point out. “The skilled mortgage pro does not lose when the market gets worse because the unreliable lenders tend to go out of business or are acquired by others, and the unreliable loan officers go back to doing whatever they were doing before,” it was noted in a FBO report.

“The slowing market fits well in a trend of expansion and consolidation. The market expands until it's white hot, then cools and consolidates before the next expansion period. It's in this period that mortgage loan originators can begin to exert influence in a way they have never been able to before. If they play it smart, today's slow-down can be the catalyst for a new glory day to come for the loan originator.”

Pressure on real estate appraisers

A key problem in today's home mortgage industry is created by appraisers who bend their ethical commitments under pressure to “hit specified numbers” in their appraisal reports. This often results in inflated property values that are, in many cases, much higher than realistic market values. This can ultimately cause major problems for home buyers who could be paying on a mortgage that's larger than their property's true value. That's a common scenario that leads to foreclosure actions.

It can also be a serious problem for banks and mortgage companies. The last thing they want is to deal with foreclosures. The pressure on appraisers usually comes from real estate brokers who are desperately trying to arrange financing for a home purchase. In some cases, the pressure comes from individual home buyers or sellers.

About 90 percent of real estate appraisers are experiencing pressure to come up with certain specified values, according to a recent research survey of 1,200 appraisers. That number is up sharply from the same type of survey conducted in 2003, when 55 percent of appraisers felt pressured to reach predetermined values. The American Society of Appraisers believes that this pressure is a real problem for appraisers. The group is committed to supporting legislation to reform fraudulent practices in the mortgage lending industry. They are actively supporting legislation to combat predatory lending and mortgage fraud.

“I'm not surprised that so many appraisers surveyed still feel pressured to hit a particular number to close a deal,” said Mike Evans, with the Society of Appraisers. “There is currently little regulation or incentive that stops this type of behavior from taking place.” ASA supports the consumer's right to receive a loan based on an accurate appraisal, a society spokesperson noted. “It's in the home buyer's best interest to receive an accurate appraisal to ensure that they are not over-paying for their loan.”

“Home buyers should take an active role in scrutinizing the practices of everyone involved in their home purchase,” Evan said. “If they feel that agents are overly aggressive in wanting the deal to go through, or if the price of the house they want to buy isn't comparable with other similar homes in the neighborhood, they should be wary.”

The FDIC (Federal Deposit Insurance Corporation) has taken the lead in informing banks of their concerns that some appraisers are not following their Uniform Standards of Professional Appraisal Practice for federally related transactions. Special areas of concern include appraisals for commercial real estate and residential tract developments.

Home values are “correcting”

Nationally, home values are declining slightly for the first time in years. Overall, the values have declined about half of one percent over the past year, as measured by the Zindex home value indicator that measures the value of all homes in an area, not just those that recently sold.

Of course, home values fluctuate widely from region to region, even in local markets. According to a report in Business 2.0 magazine, the six metro areas that are most likely to see appreciable home value increases over the next five years are: Panama City, Florida (72 percent projected gain over five years); Vero Beach, Florida (63 percent); Bridgeport, Connecticut (63 percent); Lakeland, Florida (59 percent); McAllen, Texas (57 percent); and San Luis Obispo, California (40 percent).

Reasons for projected gains: Panama City has a new airport to be built next year that will open the area to new vacationers and residents. Vero Beach has a rising demand for housing along with moderate property taxes and very nice weather – factors that always drive growth. Bridgeport is in Fairfield County , an area of staggering home prices. This city offers somewhat lower prices, making it increasingly appealing to New York City commuters. Lakeland is in an active growth area, only 30 minutes from Tampa via Interstate 4, but prices are much lower than in Tampa . McAllen is experiencing a Hispanic baby boom and rising incomes. These factors are driving demand for bigger homes. San Luis Obispo currently offers a good inventory of homes at lower prices than other mid-California markets. And it's in the center of a rapidly developing wine industry.

A view of the future home

New homes in future years will remain about the same size, on average, but will vastly change and improve in comfort and sophisticated features. That's the finding of a study recently completed by the National Association of Home Builders. The pace of changes in new homes will be much faster over the next 10 years than in recent years and buyers can expect that all homes will be significantly “greener” and more resource efficient than today, according to the study report. There will also be increasing emphasis on universal design and handicap access.

Most people assume that the average size of homes will continue to grow as it has in past years. Not so, the study revealed. The average home size in 2015 will be in the same range of today's 2,400 square feet, and homes will be more likely to be two-story rather than one-story structures. Not surprisingly, kitchens and bathrooms will continue to be the most important factors affecting consumer buying choices and will continue to feature upgraded materials and appliances. The focus on garages will also increase with more consumers preferring three-car garages. Also, door openings on garages will be larger to accommodate larger vehicles.

Responses to proposed “suitability standard”

This writer recently focused on the newly proposed “suitability standard” requirement for mortgage lenders and brokers. It would require them to evaluate whether a loan product is best suited for a borrower who is applying for a mortgage, and determine what product is suited for individual applicants. I've had quite a response from mortgage professionals regarding that proposal. Here are a couple of them:

“Responsibility for action is diminishing in our society. People know what they can and can't afford. They are living because of the choices they make. You take consequences away from poor decision-making and you breed weakness and finger-pointing. To hold lenders and brokers accountable for applicants who make poor financial decisions is ludicrous.”

Here's another reader quote: “The Fair Credit Act already requires lenders to meet the suitability clause. If Congress wants to only go after mortgages, then what about car sellers and financiers. You may only need a 4-cylinder car, not 8-cylinders. The list goes on and on. What about stock brokers?”

Condos are alive and healthy

“Reports of the death of the condominium market are greatly exaggerated,” said Bill Donges, CEO of the Lane Company, a builder of condos at points nationwide. “Despite the current slowdown in sales in some markets, condos won't go away because people like them. “Today's buyers want to live close to work, transportation, entertainment and retail outlets. A great location, a distinct product and a good price are critical to a condominium community's success,” he said.

At the height of the housing peak in 2005, condos accounted for nearly half of the 350,000 or so multifamily construction starts produced annually. Two years earlier the condo share was about 20 percent. Some of the intense demand for condos over the past three years was driven by speculators in the market, and multifamily developers acknowledge it will take some time for the excess inventory of unsold units to burn off, especially in overbuilt markets on and near both coasts.

As condo construction retreats, the next wave of multifamily development activity is likely to be in rental apartments, according to a report from the National Association of Home Builders. That will be especially prevalent in markets where the rental supply is particularly tight. Over the past three years, a significant number of rental units have been converted into condo units. Construction and land cost are up, and that concerns all apartment developers, but especially those trying to build units affordable to working families.

Key features that impact value

An interesting study was recently concluded by the National Association of Home Builders that identifies how various features in a home impacts the property's value. The association's Housing Economics Department created a house price estimator, based on data from the American Housing Survey, a nationally representative survey of about 60,000 housing units conducted by the U.S. Census Bureau in odd-numbered years.

Waterfront locations have the most significant positive effect on home values, the study determined. This applies to homes in every census region and in every type of setting. For example, being on the waterfront raises the value of a standard home in a Midwestern suburb by an average of 43 percent, and in non-metro areas in the South by 44 percent. In the central city of a large California metro areas, being on or near water raises the value of a home by 41 percent.

The characteristic with the largest negative effect on home values is the presence of abandoned buildings within one-half block or about 300 feet of the home. Bothersome trash, industrial buildings, inadequate shopping and bad roads also have a significant negative effect on the price of a home. For more information about the house price estimator, check out the model online at: www.nahb.org/estimator/ .

AIA sees growth in construction activity

The American Institute of Architects, in their recently released semi-annual report, sees the 2006-2007 period as the best two years for the construction industry since the late 1990s. They expect a significant increase in non-residential construction this year (by about 7 percent, they predict). This industry niche grew by about 6 percent last year.

“Unless there is a significant downturn in the overall economy, the prospects for nonresidential construction activity are very favorable,” said Kermit Baker, AIA's chief economist. “The high level of projected activity will help offset some of the effects of the slumping residential market in past months.”

Jim Woodard writes a nationally syndicated newspaper column on real estate news and trends, carried in about 230 U.S. newspapers – along with freelance features.  Reproduction of this report, in part or entirety, is prohibited without the express permission of the author. E-mail: storyjim@aol.com.