We now have the chance to read through the recent Stimulus/Spending Bill that was passed largely unread by our Congress. The earmarks and pork anger many, but there is good news on the real estate front:

Owners of second homes and other real estate investments will now be able to refinance their mortgage loans if they are guaranteed or held by either FannieMae or FreddieMac–and if the current value is no more than 5% over the mortgage amount.

Many real estate investors, though, have no idea whether their loans are guaranteed or owned by Fannie or Freddie. However, you may call Fannie directly at 1-800-7FANNIE or visit their site. If you complete the form on Freddie Mac’s site, they will advise you as to whether they are guaranteeing your loan or not.

To qualify for this real estate refi, there may be no late payments (30 days or more) for last year. FICO and credit scores, though, are not considered–nor will private mortgage insurance start anew.

This could be a great help for many investors and second home owners who thought only primary homes could benefit from the Fannie and Freddie refi’s. This may also be a potential Godsend for tenants who face eviction because of foreclosures. This may allow investment property owners to keep their properties–and their tenants in place

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This months hot real estate question:

Which homeowners will benefit from President Bush’s recent interest rate freeze for subprime loans? And who will be left out in the cold? It’s a question on the mind of both mortgage and real estate professionals alike.

Drumroll.

The winners, who may receive a five-year extension (and possibly even longer) on their low introductory mortgage rates, are those:

• Whose mortgage loans are truly subprime. Traditional ARM mortgagees apparently need not apply.
• With FICO scores at or somewhat below 660.
• Who originated their home loan between 2005 and this past July 30.
• Who are relatively current in their mortgage payments.
• Who cannot afford higher monthly payments.
• Who have less than 3 percent equity in their homes.
• Who actually live in the mortgaged property. Investors need not apply.
• Whose mortgage rates are due to reset in the next two years.
• Who call their loan servicers, and begin the application process. Dont expect them to call you.

The losers appear to be everyone else in San Diego, but most particularly those:

• Who are already facing foreclosure of their San Diego home.
• Who have already refinanced their homes.
• Who are more than than 60 days delinquent on more than one payment in the past year.
• Who have high FICO scores (above 660, it appears).
• Who have prime adjustable rate loans.
• Who can afford the mortgage rate reset.

Nationally, it appears that around 1.2 million borrowers may be considered for this introductory rate freeze. Some will be offered the opportunity to refinance, particularly if there is sufficient equity in the home to do so. It is widely expected that around 600,000 will actually qualify for the rate freeze.

How many homeowners will fall into this total is unknown; however, we are reaching out to our clients and readers and advising them to contact their lenders to see what options might be available. We will be following those results with great interest and would appreciate hearing from anyone who has gone through the application process.

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For almost two years now, there have been serious rumblings and grumblings about Option ARM and interest-only mortgages that could put a number of buyers into default.

I initially gave the dicey mortgages issue detached interest, because our clients tend to be a conservative lot when it comes to borrowing. We deal with few real estate speculators and most of our clients are solid buyers of primary and secondary homes.

My interest in these “instant gratification” mortgages is no longer a detached one, because the fallout from these ARMs is contributing to overall market weakness. Some of our conservative clients are seeing their San Diego home values stagnate or decline, in part due to these lending practices.   It has been reported that 7 out of 10 option arm borrowers are sticking to the minimum payment schedules–and in so doing, are stacking up substantial additional debt on their mortgages.

Many now owe more than their homes are worth.

In San Diego County, short sale advisories on listings are  appearing within our MLS on a daily basis, and will ultimately affect appraisals and valuations. In short sale transactions, the lender agrees to accept less than what is owed on the property (and obviously less than the prior appraised value).

In his Nation’s Housing column, Kenneth Harney writes that John G. Walsh, senior official at the Federal Comptroller of Currency, is sounding a quiet alarm:

“We’ve had consumers tell us they didn’t know after 60 minimum payments on a (payment-option loan), they would owe more than they did when the loan was brand new. They should certainly understand the basic bargain:  The price of a low payment now is a much higher one later. I think it goes without saying that someone, at some point, should have explained this to borrowers with these loans.”

In defense of mortgage lenders, I am sure many did explain the consequences and hazards of these loans.

I am also certain that many of these borrowers were counting on their homes’ appreciation to more-than-cover the accumulated debt on their negative ARM loans. ((Why does this so remind me of the investors who were slaughtered by margin calls during the stock market wipeout just a few years ago? Are these the same people who turned that same mentality to real estate?))

The fallout has begun. Once again, San Diego and Southern California are on the bloody edge of the real estate envelope. There are people getting wiped out in this market, and there will be those who make fortunes. We are advising our clients to sit tight if they do not need to sell–and if they do, to price their property aggressively. With buyers, we use the same caution, negotiate strongly, and advise them to stick with “blue chip” properties and locations (usually coastal San Diego and singular luxury properties). We can’t help but remind them of that dictum in the securities market: Don’t try to catch a falling knife.

Nothing is permanent, except for change.

By the time the masses have turned their real estate investment and speculation dollars to unappreciated geographical markets, smart money will already be moving back to our balmy coastal climes proving once again that nothing can take the place of location, location, location. Coastal San Diego real estate is truly blue chip quality.

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