Six Myths About Choosing a Real Estate Agent to Sell Your Property

When I meet with sellers, I often hear some variation of the same "myths"...

I need to choose my “neighborhood specialist.”

Typically buyers look in more than one neighborhood, so in fact you may have more success with an agent who understands what buyers are looking for and where else they might find it. A good agent will know more than just your neighborhood—they will know all the neighborhoods where your competition will be, and where buyers will be looking! "Neighborhood specialists" often don't even live near the area in which they claim to be 'specialists'--that's just where they choose to send their postcards. Always interview at least one agent besides your 'neighborhood specialist' to compare services being offered, and think about whether you would be more comfortable with an agent who, when a buyer comes calling, represents only YOUR home rather than yours, and the guy's down the street, and the woman's down the block - all your competition!

I should choose the agent who puts the highest value on my home.

Some agents will quote a higher listing price just to win your business, but even with the very best marketing plan, if the home is overpriced it will NOT sell. You'll end up chasing the market down via price reductions. If an agent is recommending a significantly higher list price than other agents, ask them about their history of price reductions. If you choose to work with me, I will conduct a comparative market analysis prior to recommending an asking price range for your home. I will explain how I arrived at the range, but ultimately the decision is up to you.

Open Houses are just for “looky loos” and nosy neighbors, so I've been told I shouldn't do them. Most of today’s buyers start their search on the internet, and the majority either haven’t yet selected an agent or are planning to represent themselves. For those buyers, they have no way of seeing your home other than contacting the listing agent or going to an open house. Most people are too intimidated to call “off the sign” and so open houses are more important than ever before to get the most potential buyers through your home as possible.

I need to make sure the agent I choose advertises my home in XYZ publication.

When asked where they first learned about the home purchased, 34 percent of buyers said a real estate agent; 32 percent the Internet; 15 percent from yard signs; 7 percent from a friend, neighbor or relative; 7 percent home builders; 3 percent a print or newspaper ad; 2 percent directly from the seller; and 1 percent a home book or magazine. In today’s technology era, print advertising is not where you’re going to find the buyers.

I need to choose the agent who has sold the most homes in the past year.

Every agent is an independent contractor, and therefore the variety of services offered can fluctuate dramatically even within a single brokerage. You need an agent who has enough time to attend to the details of your transaction, without farming it out to a junior assistant. Ask about which services they actually provide their clients, and who does them. Does it include professional photographers? Dedicated web sites? Professional stagers? Agent paid home warranties? Quantity does not equal quality.

I need to choose a “broker” instead of an “agent.”

After gaining some years of experience in real estate sales, a sales person may decide to become licensed as a real estate broker in order to own, manage, or operate his/her own brokerage. Brokers typically take on management or ‘back office’ duties. Agents, on the other hand, focus exclusively on their clients. If you are dissatisfied with your agent, you always have the option of contacting their supervising broker.

If you are looking to sell your home, please contact me - I'd love to detail for you the services that I provide to my clients!

Finding an Investment Property in Northern Virginia

As prices plummet, some solid investment opportunities are starting to emerge…but how do you identify good investment properties?

Step 1: Identify some target neighborhoods.

- The first thing to do is to consider long term (e.g., 10 years) appreciation potential. Think about area employment (and more importantly where those employers are—commuting time is a big factor). Also think about long term demographic shifts like BRAC, as well as infrastructure projects like new metro stations or light rail lines.
- Consider the neighborhood. Ideally you want to find the lone problem house in a great neighborhood, but that’s easier said than done. Also consider neighborhoods that previously had been more desirable in terms of age, location, and home condition, but perhaps were hit hard by this recent wave of foreclosures.
- Consider the price range – While you hope to ultimately find a property that will be cash flow positive, you nonetheless have to front the money to buy it, and getting a loan these days isn’t easy, especially for investors. Financing remains a problem, and lenders require investors to put 30% down, plus closing costs of about 3%. Interest rates run about a percentage point higher than owner occupied properties. Figure out how much cash you’re willing to put into the property, what you can qualify for in a mortgage, and back into a price range from there.
- Look at rents the neighborhood can command. Once you identify a few target neighborhoods, begin collecting rent data. The best place to collect rent data is on Craigs List in addition to the MLS. This is because many landlords conduct the process themselves and so the listings are never in the MLS. You also can’t be sure how aggressive a listing agent was in procuring a renter, which may skew the price. If they put it into the MLS but then never on Craigs List (by far the more popular site for finding renters), then it’s likely the rents there are lower than what the market actually commands. Unfortunately there’s no easy way to gather historical Craigs List data – you just need to keep watching and see which rentals seem to go quickly. Consider calling some of the landlords to ask whether they’ve had a lot of responses.

Step 2: Identify some target properties

- Short Sales & Foreclosures are a great opportunity because you can be patient. (See my post on the challenges of timing a foreclosure transaction here and the frustrations of shorts sales that never close here.) While an owner occupant doesn’t have the luxury of time and can get frustrated with all the problems of these transactions, investors can go with the flow since their timing is more flexible. And that flexibility pays off by getting properties for less money.
- Consider the home’s condition and your level of expertise in doing or managing renovations. Many of the short sales and foreclosures on the market today come at bargain prices, but require everything from heavy cosmetic work to kitchen and bath remodels to mold remediation. Very few properties in the attractive price ranges are move-in ready, but there's a lot of upside for people not afraid of elbow grease and with the right handyman connections.
- Be patient. You may need to wait for the right house at the right price. Set up an alert so that you can be ready to jump on a property that meets your investment needs as soon as it comes on the market—you can be sure other investors are circling and waiting for the right opportunity as well!

I’ve seen some inside the beltway single family homes below $400K and townhouses in under $300 in areas that I feel have great long term potential given our area's strong job market and expected government growth (see this post on the best place to live in a recession here, and article on the bailout being a boon to our local economy here.)

In another post I’ll cover how to look at cash flows for an investment property.

I’m working with several investors and have already previewed many homes that fit the criteria above. Call or email me to set up an appointment to discuss investing opportunities!

How Much Do I Need for a Downpayment?

How much do I need for a downpayment?

It depends.

(Come on, you knew I was going to say that.)

There are some rules of thumb though. First, you can bet you need a heck of a lot more than buyers did a few years ago, or even one year ago. There are lots of influencing factors: type of financing, amount financed, type of home (condo/townhouse/detached house), and whether it’s an investment property or you intend to occupy it.

To understand downpayments, we really need to understand the Private Mortgage Insurance (PMI) industry. These are the guys who ‘insure’ the loan for the bank. If you have less than 20% equity in the property (whether via a downpayment or appreciation), any lender will require you to buy PMI. PMI premiums are paid by the borrower, but the beneficiary is the lender. So in other words, if the borrower defaults, then the PMI policy will pay the lender.

Up until recently, banks would issue a “second trust (mortgage)” rather than requiring the borrower to pay for PMI. So a borrower would have a first mortgage for 80% of the value, then a second mortgage for somewhere between 5% and 20% of the value—so the borrower needed as little as 0%. The mortgage interest on the second trust was deductible (a win for the borrower), there was less downpayment needed (another win for the borrower), and the bank got a second loan at a higher interest rate than the first (a win for the bank, or so they thought at the time, AND they held the home as collateral, which couldn’t possibly fall below the value at which it was purchased, right??) The only people that lost out were the mortgage insurance folks.

Fast forward to the default wave of the last two years. Banks are now holding two bad loans instead of one, and no insurance policy to collect on. PMI folks were just fine with that, as they had their hands full anyway with all of their own defaults. In today’s lending world, you can’t find a bank who’s willing to do a second trust that takes the total loan-to-value (LTV) ratio above 80%. So basically: no second trusts. And it’s really tough to find a PMI firm who will insure a loan without meeting certain conditions.

To really know what downpayment you need, you need to talk to a lender and find a program that works for you. But here are some rules of thumb:

- Conventional loans, count on needing 10 to 20%
- FHA – will require 3.5% (as of 01/01/09)
- VA loans – this is about the only program going where you can still get 100% financing, so if you’re a vet, look into it!
- Investment properties – 30%

There ARE special programs out there, though, like HPAP in the District and VHDA in Virginia. So, again, talk to a lender. I can recommend some great ones. You also need to keep your realtor in the loop. Often certain property types don’t work well with certain loan programs, or may trigger additional downpayment requirements.

If you’re confused about where to start your search and understanding how much you can afford, send me an email. I’m happy to work with you to see what types of homes and program combinations will work best for you.

How will the election and relocating administration staff impact the Washington, DC, area real estate market?

I’m often asked whether the market will pick up after the election, with the incoming administration. Whether the Republicans or Democrats win, a wave of new junior staffers and senior officials will sweep into Washington, DC. My guess is that the impact on the real estate market will be positive—by which I mean positive for sellers--for this reason: people who make a career of politics often don’t leave once they’re here.

What I mean is this: many of the current administration won’t leave, so it’s not a one-for-one swap in residents even with a complete turnover in administration. Some will have fallen in love with the area, some will have kids in schools or other local commitments that they don’t want to give up, many will be absorbed into local lobbying and law firms. So 100% of the current administration won’t be leaving. Of course there will be some houses put on the market, but I’m guessing not many.

On the flip side, though some of the next administration will undoubtedly already be living locally, there will be definitely be an influx of new residents as staffers and administration are relocated here from other parts of the country for their new appointments. Those people all need a place to live, whether it’s renting or buying. Junior staffers will undoubtedly rent, but senior officials and their families could just as easily look to buy—especially when they absorb the sticker shock of high rental prices in this area. They’ll likely decide this is certainly a good time to buy, with historically low rates, relatively high (though shrinking) level of inventory from which to choose, and their new four-to-eight year time horizon. The District and Arlington, after all, were recently named two of the top ten places to live in a recession, and our local real estate market has held up relatively well versus most of the country.

Since most of these new residents will be working in the District, I expect the real estate market to tighten in the District and close in, metro-accessible areas like Arlington, Alexandria, Bethesda, Silver Spring, Falls Church, and Vienna. Outer areas like Prince William likely won’t see a bump, but that’s okay—their current uptick is coming from the investor community.

Time will tell, but I predict that the incoming administration will cause a tightening of both the rental and purchase markets in close-in areas.

Are you a member of the new administration looking for help in understanding the local real estate market? Confused about where to rent or buy? I’m licensed in DC, VA, and MD and would love to help you. Contact me for an overview of the area and the local real estate trends.

$5000 Credit for DC First Time Home Buyers

Here's a little known add-on to the 2008 Emergency Economic and Stabilization Act - aka the $700 billion bailout bill: the $5000 credit for DC first time home buyers.

Area residents are familiar with this credit, and know that it had expired on Dec 31, 2007. Though typically every year it's passed in a last minute rush of bill approvals, there's never a guarantee and 2008 home buyers had their fingers crossed that it would once again find its way into a bill before year end. Well, DC home buyers, start celebrating: The bailout bill approved the $5000 credit retroactively for all 2008 purchases, and approved its use for all 2009 purchases as well!

To use the credit:
- You must buy a home in the District of Columbia (and not have owned a home in the previous year)
- You must occupy the home as your principal residence
- You must meet the income requirements (up to $70K AGI for single filers, phased out until no credit for AGI above $90K; up to $110K AGI for joint filers, phased out until no credit for AGI above $130K).

Note that this is an actual $5000 credit (not a deduction--an actual dollar for dollar offset on money owed!) on your Federal Taxes. That's the same as Uncle Sam giving you $5000 of your hard earned money back just as a 'thank you' for buying in the District. But you can't take advantage of both this credit and the new Federal $7500 "credit"--not really a credit at all, but rather an interest free loan. For almost all buyers, you're much better off taking the DC credit and passing on the Federal loan.

If you're interested in buying a DC property and want to learn more, contact me.

$7500 First Time Buyer Tax "Credit" Info

NOTE> This post applies only to homeowners who purchased in 2008. If you purchased in 2009, see the updated version of the credit here.

It's official, the $7500 tax credit for first time buyers is now law. But how will it work?

First of all, it's not really a 'credit' per se -- it's an interest free loan. Nonetheless, as my first time buyer clients will tell you, an interest free loan is the best kind of loan! First time buyers -- defined as buyers who have not owned a principal residence during the 3 year period prior to purchase -- will claim this credit on their tax returns, and receive a credit of 10% of the purchase price, up to a maximum of a $7500 'credit.' (Note this is NOT a deduction. Taxpayers receive the full $7500.) Here are the additional details:

• All homes, including condos, are eligible.
• The 'loan' part comes into play because it must be repaid over a 15 year period at $500/year starting in 2010.
  
• The purchase must be on or after April 9, 2008 and before July 1, 2009. (Note the law says BEFORE, so those of you buying next year - settle on or before July 1!)
• There's an income restriction: Single taxpayers can't make more than $75,000 and married couples are limited to $150,000. Above those limits, the credit is phased out.
  
• Sorry, DC home buyers, you can't claim both this and the DC First Time Buyer credit. (That one is a real credit, not a loan, so for almost everyone the DC credit is the better deal.)
• There doesn't appear to be any way to get the money in advance, so this credit will have to be a 'reimbursement' of sorts for buyers. You can however, as with any purchase, adjust your withholding to better match your (now $7500 lower) tax bill. The closest thing you can do to getting it sooner than later is to buy a home in early 2009, but then you apply the credit to your 2008 return (before April 15) since the law allows you to choose the year in which you apply the credit.
  

You can learn more at www.federalhousingtaxcredit.com

Update 1/29/09: President Obama's $820B stimulus package contains a proposal to eliminate the need to repay the $7500 -- it would change into a straight on credit, rather than the interest free loan it currently is. This bill has passed the House and is currently with the Senate -- the bill is NOT yet law. Stay tuned.

Why I May Not Be Able To Represent You

When someone calls me to tell me they want help writing an offer and they already know what property they want, my heart sinks. Seems counter-intuitive, right? I had to turn down two qualified buyer clients so far this year. I really wanted to work with them, and they each really wanted to work with me. What gives?

Both instances had procuring cause issues. Procuring cause is the legal term that gives a buyer agent the right to claim the person as their client, and therefore claim the compensation due in the sale. The agent must cause the buyer to procure the property—and only one agent can be a procuring cause for any given property. Interestingly, procuring cause has very little to do with whether or not a buyer has signed a buyer broker agreement, which leads to some very unfortunate circumstances like I experienced.

In the first case, the buyer had contacted the listing agent (who represents the seller) to view the property. The agent went on to recommend a lender, and discuss specifics of what an offer might look like in terms of a proposed offer price, settlement date, inspections, etc. (This brings up another pet peeve of mine—dual agency. I’ve yet to have someone explain to me how a single agent can best represent both the buyer and seller in a single transaction. You can deal honestly of course, which one would hope an agent would do regardless of whom they represent, but to fully represent the best interests of both sides seems impossible to me. That’s why many states have made it illegal.) This buyer did NOT sign an agreement with the agent, but nonetheless had an implied agency agreement due to their interactions, which prevented me from representing her.

Moral #1: Do NOT call the listing agent to view a property you’re interested in—you may inadvertently restrict your representation options later. Wait for an open house, or better yet, find your own buyer’s agent.

In the second case, the potential client again reached out to me to ask me to represent him. Unfortunately he had already seen the property—new construction—on which he intended to make an offer. He had seen the property with another agent he had been working with, but whom he now did not wish to be represented by. Again, no signed agreement was in place. But merely by being accompanied by this agent to the sales office, he was now ‘registered’ with this agent. He did it exactly right by registering with an agent—sales offices are notorious for now allowing representation later if you don’t, but unfortunately he decided he just didn’t work well with this agent. But my hands are tied—the other agent is his registered agent, at least for purposes of that particular property.

Moral #2: Choose your agent carefully. You may not be able to change later, with or without a signed agreement.

In both of these cases, the agent is reasonably seen as the procuring cause—that is, the agent who took significant steps to help the buyer procure the property either by providing access, assisting with process guidance, or simply being present at time of registration. Which is why my heart sinks a little bit whenever someone calls me to ask me to represent them and says ‘and I already know which property I want.’ Because chances are that I can’t help them, as much as I’d like to.

Procuring cause gets very complicated. It doesn’t mean that once you start working with an agent, you’re locked in even if you didn’t sign anything. Assuming you are not bound by a written contract, you can begin working with another agent. It just gets a lot trickier (though not impossible) if you end up buying a property you saw with the first agent.

If you’re concerned that you have unwittingly created an implied agency relationship, talk to the agent, or if you’re uncomfortable, the agent’s managing broker. Or barring that, the agent you then wish to engage. It’s quite possible that the first agent will ‘release’ their right and you can move on as you wish. Or alternatively, the old agent and the new agent may be able to work something out. Of course, the best thing to do is, right at the beginning of your search, choose an agent with whom you’re comfortable, but hindsight is 20/20 in that regard. I encourage potential clients to get me involved as early in the process as possible—even if your purchase is many months away. Better to have a patient advisor (I have clients who have been looking well over a year!) than to be denied the representation you want later.

FAQ: If the Seller Pays the Buyer's Agent, How Do I Know My Buyer Agent is Doing Her Best for Me?

If buyer agents are paid by the seller, how do I know they are working to get me the best deal?

I’m often asked this question, especially by readers of Freakonomics (a great book!). It’s a fair question; it seems that it’s an inherent conflict of interest.

Let’s discuss how agents are compensated. Sellers don’t hire an agent, they hire a broker, though in reality sellers often choose a broker based on the agent they like. Let’s say it’s Long & Foster. Long & Foster then has individual contract agreements with many, many agents. (Agents are NOT employees—we’re all 1099, or individual contractors. That means we get to deal with the joys of finding our own health insurance, funding our own retirement, paying our own marketing expenses, and dealing with our own quarterly tax filings, not to mention the 7.5% self-employment tax! But I digress.) Each agent has their own agreement indicating how they will be compensated on every transaction, whether it’s a flat percentage, sliding scale, etc.

A seller agrees to pay a listing broker a compensation of what we’ll call X% or $X. Further, that agreement says that the listing broker will pay a co-operating broker (who represents the buyer) Y% or $Y of that total. That portion gets paid if and only if the buyer has representation. If the buyer does not have representation, then the listing broker keeps the whole thing. Similar to the listing broker and his agents, the co-operating broker (who represents the buyer) has similar agreements with their own agents.

So far, we have x%/$ being split 4 ways: the listing broker, the co-operating broker, the buyer agent, and the seller agent.

So if I, as your buyer’s agent, am getting paid by the seller (though technically it’s the co-operating broker getting paid by the listing broker), and one way or another it’s tied to a percentage of sales price, then how do you know I’m doing the best job I can for you?

I wish I could give you a checklist of “How To Know Whether To Trust Your Agent” but it’s not that simple. Buyers need to choose an agent they trust to have their best interests at heart. It’s a combination of experience, education, and your gut. One thing is for sure: if you are asking yourself this question, you probably don’t trust the agent you’re with.

Here’s another way though: Know whether your agent is building their business based on referrals. Do they keep in touch with past clients? Do they communicate often with you? Do they have events throughout the year designed to thank clients for their business? Are past clients satisfied? These are all indicators that they depend heavily on referrals to build their business, and it’s therefore very important that they do a good job.

These are qualitative ideas though, and I know people want numbers – so let me give an example of why a smart agent knows more important that I do a good job representing a buyer to get future business rather than get a higher commission on a single transaction. Let’s say a buyer overpays by $10,000—that’s real money. Once the transaction is recorded and the buyer lives there for awhile, it will become very clear whether they’ve overpaid. Neighbors talk, and tax records are public information. And if they have overpaid, they obviously will not be pleased with their agent, and will not send any future business. That $10,000 in sales price represents—after splitting four ways, accounting for taxes, etc., about a few tanks of gas in my pocket as a buyer agent. Seriously, no joke. Why on earth would I jeopardize a client relationship, future referrals, and even a future sale (after all, you’re likely not going to stay in that house forever) for such a small amount? For two tanks of gas I’d give up a future revenue stream worth thousands, or maybe tens of thousands? I think not. One of my clients—who happened to be amongst my smallest dollar transactions, by the way—sent me TEN referrals last year!

And therein lies your goal: Find an agent who values the relationship, and builds their business for the long term. Then you can be confident they have your best interest at heart, regardless of who is paying them.

Short Sales: Are They Worth a Buyer's Time?

Yes. No. Maybe. If you’re looking for an absolute, don’t bother reading this post. I’ll go out on a limb and say usually it’s a waste of a buyer’s time—the odds are certainly against it.

What is a short sale? It’s a sale where the debt owed combined with the costs associated with the sale exceed the property’s market value. Creditor(s) MAY be willing to agree to allow the property to be sold for less than the loan amount.

You can recognize these listings by key phrases in the comments section such as “short sale” or “third party approval required” or “lender approval required.”

As a seller, how do I go about a short sale?
Every bank is different. At a minimum, you will need to establish that you are financially incapable of paying the loan(s). You must submit W-2s, bank statements, tax returns, a “hardship letter” stating the reason the credit should consider granting a short sale, and other financial statements outlining your assets and liabilities. The hardship letter is particularly important. Stating that your house isn’t worth what you paid for it is NOT a hardship. You must establish why you are no longer able to afford the payments.

As a buyer, I keep hearing that Short Sales don’t close. Why not? Can I do anything about it?
Some close, but it’s true that most do not. A quick search of the local listings showed 282 active short sales. In the past 90 days, only 35 closed. That’s a very poor hit rate. Short sales are typically priced at or just below current market value, and that’s reflected in the close price of those 35 homes—average closed price was $367K versus an average list price of $373K—98% of asking!

The overwhelming majority of short sales don’t sell and/or close because of one of these reasons:
(1) They aren’t priced competitively so don’t get any offers. On the flip side, sometimes they are priced at a low price that the bank will never accept!
(2) The sellers have not met the lender’s requirements to approve a short sale (e.g., have not submitted a hardship letter or otherwise proven that they can no longer afford the payments
(3) A secondary or tertiary lien holder has not approved the sale (if the first lienholder isn’t getting paid in full, the guys behind him are making nothing, and so have zero incentive to sign off on a deal). Often in this situation they will ask for a personal Promissory Note from the seller. If the seller refuses, it will scuttle the entire deal.
(4) The lender has received all of the paperwork but is “stringing along” the seller to collect a few more payments
(5) The lender has received all of the paperwork but is planning on foreclosing and collecting the mortgage insurance.


Buyers have no control over any of these reasons. Sellers have limited control over some. But it only takes one of these to prevent a short sale, so the odds are against it. In particular, if the bank is bound and determined not to approve a short sale (reasons 4 and 5), then no one can make them. If a seller is determined that they do not want to attempt to repay any of their debts (reason 3) then it’s not going to happen. Reasons 1 and 2 have a much better chance of closing. But why would a homeowner and agent list a home when it’s either overpriced or when the paperwork isn’t in? Lots of reasons: naiveté, ignorance of or inexperience with the process, denial. Why would an agent waste their time with a listing that won't sell? In most cases, there’s no real ‘cost’ to them. Agents decide individually how they want to market properties and how much they'll spend doing so. So they choose to spend nothing, and infact, they still get some free advertising via the yard sign and mere existence of the listing.

How can buyers identify a short sale that is more likely to close? Agents can put basically anything they want in the comments, but a few key phrases give you slightly better odds:

• Bank already approved price of $x/Short sale already approved
• Only one lien
• No waiting/bank ready to close/can be closed immediately
  
• Paperwork already submitted
• Quick Response/Turnaround in x hours/days/weeks
  

And of couse, you should have your buyer agent contact the listing agent to see what the status of the paperwork is. If the agent doesn't know or doesn't return the call, it's likely to be a waste of your time as a buyer.

Buyers, remember that, just like with foreclosures, timing is a big issue and so taking your chances with a short sale isn’t for everyone. With every passing week, banks are getting more efficient at processing these, so we might see more short sales and foreclosures closing. There’s also speculation that banks have too much real estate owned (REO) on their balance sheets, which impacts their regulatory capital requirements; so they may very soon be more amenable to short sales in the months to come.

Read More: Foreclosure Risk Series

Read More: Understanding the Difference Between Short Sales, Foreclosure Auctions, and Bank Owned Properties (aka REO)

Out: Exotic Loans, 100% financing; In: FHA, VHDA!

FHA is back with a vengeance. It's a key tool in the current lending environment for getting buyers qualified with only a 3% down payment (with gifts permitted in certain circumstances.) There are a few extra hoops to jump through, but I find more and more buyers are utilizing FHA now that the lending limits have been increased in our area.

The Virginia Association of REALTORS has this webcast "Mortgage Lending in 2008: Back to the Future, How FHA can help you and your clients," for agents, but I think it provides a good overview of FHA for anyone thinking of buying. At about an hour, it's a bit long, but worth it.

Some Restrictions on Condos
FHA won't work in some instances, though. Sometimes condos--especially new construction--gets tough. Condos must be on the FHA-approved list to qualify. If it's not on the list, it's still possible to get a spot-approval, but it must meet certain other criteria, e.g., more than 60% owner-occupied, which sometimes is problematic with condos. Some of the criteria may be streamlined as part of an expected upcoming FHA modernization, though, so stay tuned.

VHDA Loans
Another great option for first time buyers in our area are programs through VHDA (Virginia Housing Development Authority), which provides a variety of low-interest loan programs and low-down payment options for buyers who meet certain maximum income limits and property price restrictions. You also must not have owned a home in the previous 3 years unless you're buying in a designated target area, must attend a VHDA-approved educational seminar, and meet certain other guidelines.

Read more: Mortgage Loans: Jumbo, Conforming, FHA, and Jumbo Lights

Read more: Why Don't Fed Cuts Always Cause a Drop in Mortgage Rates?

Read more: What is Private Mortgage Insurance (PMI)?

Want to learn more or have more questions? Attend a free first time home buyer seminar that I teach.

Foreclosure Risks: Title Defects

One risk of buying an REO (bank-owned) property that you rarely hear about is the potential for title issues. Buyers incorrectly assume that since liens are typically extinguished in a foreclosure, that the title is free-and-clear. Not always so!

Let’s discuss the process. Lenders require buyers to obtain title insurance on the property. These policies protect the lender, and if you opt for extended coverage, the buyer. (See my post on how to save money on a title policy on a non-REO purchase here.) The policy protects against defects in the title, competing claims, etc. To issue this insurance policy, the settlement attorney’s office will perform a title search, issue a commitment to insure (sometimes called a binder).

The REO addendum (see post on risks of that addendum here) is usually written such that the bank is protected even if the title they convey isn’t perfect, so you can’t come after them if you determine later that there is a title issue. More importantly, the addendum requires only that they convey insurable title, not marketable title, as is required in the standard Regional Contract. Remember that the addendum trumps the contract, so don’t go relying on that paragraph in the offer that requires marketable title.

What’s the difference between insurable and marketable titles? Marketable means it’s free from threat of litigation. Insurable does not guarantee clean title, but rather simply requires that there is a title insurance company willing to “insure over” the defect. (Ever wonder why bank addenda require that you use their title insurer and settlement agent?)

Why should you care about insurable versus marketable title? Because when YOU go to sell down the road, you won’t have the benefit of that trump card, the REO addenda, nor will you have a settlement attorney in your pocket that will “insure over” defects. It’s possible that the price on an REO deal will be such that you don’t care about the insurable versus marketable difference—but make sure you review, and ask lots of questions about, what is being “insured over,” or you may find yourself paying to cure title defects years later when you sell.

What can a buyer do to protect himself? First, choose your own settlement attorney. Have them perform a title search as quickly as possible to identify any problems early. If the bank insists on using their title company, consider shelling out the few hundred for your own concurrent title search. Many foreclosures have significant title issues, and many bank addendums provide a very tight timeframe for identifying and objecting to them. An example of an issue that might be identified would be if the listing included a parking space, but upon searching the deeds, the bank didn’t actually own the parking spot—how can they convey what isn’t theirs? Second, review that title search and make sure you understand all the possible defects. Finally, buy the best title insurance you can--it's a one time cost at closing that may save you many times more than the cost of the policy.

Read more: Beginning of series on Foreclosure Risks

Resource: A great local settlement attorney - Ekko Title

Search for foreclosures

If you're interested in learning more about REO and foreclosures, or thinking of buying one, I'd love to advise you on the home buying process.

FAQ: Mortgage Loans - Conforming, Jumbos, FHA, Jumbo Lights

Although I’m not a mortgage broker or lender, I get a lot of questions from my clients and in my first time homebuyer classes about interest rates, points, and fees. There’s a lot of confusion out there right now about what the conforming limits are, how FHA works, and what the stimulus package impact will be. The short answer is that we don’t have all the answers yet—the mortgage market changes by the minute. I always recommend to my clients that they choose a lender they trust and then stick with him/her (I’m happy to make a recommendation or two if you contact me.) An online mortgage calculator will never keep up with the pace of change and options (both coming and going) in today’s market. In my opinion they are nearly worthless if you're seriously thinking of buying a home (though if someone has found a good one, by all means, let me know!)

Here are some of the basics, including some basic economics on risk and reward (I admit these are over simplified, but I think will suffice to give buyers an idea.) You have to think of your mortgage as an investment product. Somewhere out there is an individual investor with a million dollars to invest; He can invest in the stock market, in gold, in CDs, are in mortgages, for example. The higher the risk he takes with his money, the more reward he will expect. These are some of the “flavors” of mortgages and rates:

• “Conforming” Loans. Until recently this meant ONLY loans less than $417,000 that met Fannie and Freddie underwriting guidelines. Fannie and Freddie are government sponsored entities that purchase loans from banks, package them up, and sell them off. Because the bank has a “guaranteed” buyer for your loan, it lowers their risk and hence lowers the interest rate (low risk for a bank = low reward for a bank.) Fannie and Freddie also slap their own guarantee on these products, so the people they sell them to are willing to earn a lower return because there is less risk. These loans have the most competitive rates. All Fannie and Freddie loans are subject to their underwriting guidelines, including their downpayment restrictions. Because both entities have slapped a "declining market" label on our area, downpayment requirements are higher now than they were a year ago to the tune of 5%. So if previously you were the quality of borrower that could have qualified for a 95% loan-to-value (that is 5% downpayment), this new label means that you now only get 90% (a 10% downpayment) if you want a Fannie- or Freddie- backed loan.
  
• “Jumbo” Loans. Loans that are above $417,000. They carry a higher rate because Fannie and Freddie are prohibited from buying them, and hence the risk to your bank is higher—they need to find a buyer out there, or they need to keep it in-house.
• “Jumbo light” or “jumbo conforming” Mortgages. These are new in 2008 as a result of the stimulus package. Fannie and Freddie are temporarily allowed to buy loans up to 125% of the median purchase price of an area. For the Washington, DC, area, that means $729,950. So this new layer represents a loan that meets Fannie and Freddie’s guidelines and is between $417K and $729,950. Rates on these loans are still in flux, but chances are that it will be somewhere between “conforming” and “jumbo.” Fannie and Freddie put some limitations on which ones they will buy though, so expect some hoops: at least 10% down, or 20% if your FICO score is less than 700, among others; Below 660 and you’re out of luck altogether. One thing the market (our individual investor out there) doesn’t like about this new layer is that it’s temporary, so he’s not sure what will happen to it in the future. Investors don’t like uncertainty, so even though there’s a theoretical “buyer” out there in Fannie and Freddie, he nonetheless wants a premium for it in the term of a higher rate of return.
• FHA Loans. Once the stepchild of the mortgage industry, it’s quickly coming back in favor because of its low down-payment (3%) requirement. FHA loans are guaranteed by the government, so risk to an investor is low. Low risk = low reward, or in other words, lower rates charged to borrowers. FHA until recently had a very low limit, so was not widely used in this area. But Congress recently approved an upper limit of $729,950 in our area (same as the “jumbo lights”). Similar to that scenario, rates on that mid-tier (between the old limit of $362K and the new limit of $729K) will likely carry a small premium over “regular” FHA loans below $362K. FHA comes with its own set of hoops to jump through; for example condos must be on the FHA approved list.

Again, I highly recommend speaking to a mortgage professional if you’re not sure which product is right for you – they all have advantages and disadvantages, and programs and guidelines are changing daily. In a future post I’ll try to touch more on FHA loans, the Nehemiah program (a roundabout way for a seller to “gift” your downpayment!), and the rates/points/fees tradeoffs (the best rate isn’t always the right answer!)

If you’re interested in learning more, I encourage you to attend my first time home buyer class. Details are here, and you can email me to register.

Are you ready to begin your home search? I’d be happy to speak with you about some of the advantages and disadvantages of loan programs and how they impact your negotiating ability in a transaction. Just drop me an email or call and we’ll set up some time to talk about your search.

Read more: Why Don't Fed Cuts Always Cause a Drop in Mortgage Rates?

Read more: What is Private Mortgage Insurance (PMI)?

Want to learn more or have more questions? Attend a free first time home buyer seminar that I teach.

Buyer FAQ: Do I need to hire an attorney?

In Virginia, buyers have the right to choose their own settlement attorney. The settlement attorney represents neither the buyer nor the seller though. So buyers often ask me if they need to hire their own attorney as well. Marcus Simon of Ekko Title, a well respected settlement attorney in the area, has written this special "guest post" to address the ins and outs of attorneys during the real estate process here in the DC area. (I highly recommend Marcus for anyone looking for a real estate attorney, by the way!)

Many real estate sellers and purchasers wonder if they need to hire an attorney to represent their legal interests during the course of the transaction. The answer - predictably - is it depends.

In some parts of the country it is routine for both parties to a real estate transaction to engage counsel. I know this because clients coming from New York and Boston expect to need a lawyer. In California and other west coast states, the real estate transaction is treated more like a financial transaction and there is little attorney involvement, with closing or "escrow" services provided by the bank or mortgage lender.

In the Washington D.C. Metropolitan area a sort of middle ground approach as evolved over the last 20 years or so. Most real estate settlements are handled by non-attorney Settlement Companies or Title Companies. Most of these companies affiliate with law firms to provide certain necessary legal services, like the drafting of Deeds, Powers of Attorney, and other legal documents.

In the vast majority of cases, neither the Purchaser or Seller hires their own attorney, but both agree to allow the Title Company’s affiliated attorney to provided certain legal services and acknowledge the potential that legal conflicts of interest may arise. Contract negotiations, both before and after ratification, including home inspection and other issues, are handled by the Real Estate agents. Occasionally issues arise that the agents cannot resolve without attorney involvement. For instance, there may be a difference of opinion about whether a lien on the property is a cloud on title that would allow the Purchaser to get out of the contract, or what responsibility a Seller has to remedy an encroachment shown on their house location survey. In those cases, the Title company attorney should have provided a list of three independent attorneys for the parties to engage.

In some cases attorneys are engaged from the start. In many Estate cases, for instance, attorneys are hired to handle the sale of property where there are a number of heirs involved in the transaction and there will be additional documentation require to convey clear title. In commercial transactions the parties almost invariably use attorneys throughout the process to draft contracts (as opposed to form contracts usually used in residential transactions) deeds and loan documents.

For most sales, however, from the $300,000 condominium, to the $3 million mansion, the parties rely on their real estate agents and an experienced, competent, and professional Title Company attorney to guide them through the process and help mediate any issues before they become disputes.

Marcus Simon

Founder, Ekko Title

Partner, Leggett, Simon, Freemyers & Lyon, PLC

Foreclosure Risks: Unpredictable Transaction Timing--Don't Pack Those Boxes Yet!

I’m often asked about the risks involved with buying a foreclosure. This is the second post in a series of as-yet-undetermined size. (Have a question on the risks? Contact me.) The first post on REO Bank Addendums covered the all encompassing risk—the risk that the bank can basically do whatever they want, including walking away at any time with no penalty, if you’re not very careful with what you sign. That addendum always includes one or more clauses protecting the bank if they are unable to meet certain deadlines—like actually proving they are the owner (oh, do I have to OWN the property before I sell it?) before settlement. These broad clauses lead to our second major category of risk: controlling the timing of the transaction.

In a typical transaction, you make an offer, the seller takes a day or so to review it and either a) accept, b) counter, or c) reject. If you’re concerned that a seller might be “sitting on the offer” to wait for a better one, or even “shopping it around” by calling all the agents who have previously visited the property to see if they can scrounge up a competing offer, then you might consider including an expiration or exploding clause. These clauses state that the offer will expire by x time and date if not responded to in writing. It’s a great way to protect a buyer and maximize your chances of a quick turnaround.

However, with a bank owned property, the bank takes as long as they darn well please. Might be a day, might be a month, might be several months. They don’t really care about your expiration clause. Well, maybe not that they don’t care, it’s just that they’re a big corporate entity, and your offer is likely to be sitting in a pile of paperwork that needs to get done asap, but the individual sitting in a cube somewhere really doesn’t have the right incentives to make sure he gets to your offer today, or tomorrow, or the next day.

In the meantime, you’d be wise to keep looking at properties to see if there’s anything better that catches your eye. As a buyer you have the right to withdraw your offer anytime before the bank gets back to you. In reality, the bank’s response will NEVER be an “accept.” Rather, it will ALWAYS include that pesky Bank Addendum that you will have to read (please, I beg of you, read) and sign before your contract becomes official.

Once you’re ratified, is it time to give notice on your lease and call the movers? Hardly. Remember one of the common clauses is for the bank to give themselves the right to back out at any time. I’m not saying the bank does this out of malice…there are a million reasons (deed issues or delays are common) the bank might be very willing, but simply unable, to proceed to settlement. (You’d be out the cost of your appraisals, inspections, moving deposits, etc in this case.) As an aside, you can be sure that one of the clauses in that Addendum imposes a hefty daily financial penalty on the buyers if they aren’t ready for settlement on time, so apparently what’s good for the goose is NOT good for the gander.

Other than not being sure when to start packing, this open-ended timing creates issues with financing. Most loans are locked for just 30 days, and after that you need to pay a fee to maintain the lock. If you pay the fee, you may be out that money and never close. If you don’t pay it, and rates change, you may be in an even worse situation—in fact you may not even qualify for the loan anymore if rates change too much! Make sure you fight hard for a financing contingency that will protect you in the even that settlement gets delayed. (Side note—often banks will offer to give you financing in the event of problems…but they never specify the terms!)

So when can you start making plans? Not until the deed has been recorded, which is typically the day after settlement. Yes, you read that right. Don’t make any plans to move until a day AFTER SETTLEMENT OCCURS.

If your lease is up soon without the option to go month-to-month, make sure you have a back up plan for where to stay in the event of unforeseen delays. The timing risk can be partially mitigated by 1) continuing your search knowing you have the option to walk away and 2) keeping a financing contingency. But chances are strong that you’d incur extra expenses, along with sleepless nights, along the way.

Thinking of buying a foreclosure? Contact me to discuss the other risks and how you might be able to mitigate some of them. Remember, it's not a bargain if you're taking on too much risk for not enough reward.

Read the next post in the series on Foreclosure Risks: Property Condition & Inspections

Read more on the differences between short sales, foreclosures, and REO properties.

Read the first post in the series--risks related to Bank Addenda--here.

Foreclosure Risks: Read Those Bank Addenda!

I get a lot of questions on foreclosures. How could I not? Some neighborhoods are flooded with them (though some are not...see the graph in my post on Beyond Auctions.) Buyers want to know if they’re a good deal, what the risks are, and how they can get in on one.

I’ve decided to write a series of posts on the risks specific to buying foreclosures—trust me that there are too many risks to put into one post! Some risks can be mitigated, some can be eliminated, but most remain; that’s part of the trade off you make in deciding to buy a foreclosed property.

First, a quick overview on the process. (For a review of how a home moves from short sale to auction to REO, read the post “I want to buy a foreclosure.”) Once a home is foreclosed upon, also known as Real Estate Owned or bank-owned, it is usually listed in the MLS with a listing agent, similar to any other home for sale. It will usually be noted right in the comments that this is a “bank owned property” or “special addenda required.” What is this special addenda?

When you decide to make an offer on a foreclosure, you put together the offer using the standard regional forms, just like any other resale (though not the same as new construction—for those you use the builder’s contract.) You include any contingencies or other negotiables you want—home inspection, seller subsidies, etc. Then you send it off to the listing agent, who sends it to the bank. The bank’s representative may respond right away, they may throw it into a pile to see what else comes in, or they may not do anything. (So controlling the timing becomes a big risk of a foreclosure, but I digress.) Let’s say they get back to you and let’s assume they even agree to all of your terms. They’ll return it all with a copy of their own Bank Addendum. An addendum is simply the legal term for a condition that amends the main contract. Even “regular” resales have a half dozen addenda-- for home inspections, appraisals, and to meet jurisdictional requirements. Bank Addenda are written by the bank’s lawyers to protect themselves during foreclosure transactions. Any guesses on which side they favor?

Every bank’s addendum is different, and it’s critical that you read and understand every clause prior to signing it. Because it’s an addendum, which amends the main contract, it doesn’t really matter what you think you negotiated—anything in the addenda trumps the main contract. Think you negotiated an inspection but the addendum says no? Or what if the addendum says you can inspect but not void? The addendum wins the day. A lot of good that inspection does you if the home inspector says the place needs to be demolished by you aren't allowed to walk away.

Unless you sign the addendum, there’s no deal, so you can still get out if you don’t like what you read. Occasionally, on some clauses, you may be able to negotiate certain clauses, but that increases the likelihood of slowing down the process—after all, some guy in a cube in Idaho (no offense, readers in Idaho) has to get that change sent to the bank’s lawyers to review, and I guarantee that those lawyers have their hands full with all their other foreclosures right now. If you decide to live with the clauses, then once you sign the addendum, the contract proceeds as is more typical.

There are many examples of egregious clauses, but here are a few of my favorites:

- The bank may not own the property and may not be able to go to settlement. You may be required to go to settlement even if the bank cannot deliver the deed at that time.

- The bank may guarantee only insurable title, not marketable title (more on that in another post)

- The bank may give themselves the right to change their mind and walk away at any time up to settlement for no penalty

- There may be easements or restrictions on the property that aren’t recorded; if you find one, the addenda may prevent you from backing out of the contract as a result

There are many more, as these addendum often run about ten pages. Because they are written to apply nationwide, there are occasionally even clauses that are illegal in Virginia!

So read those addenda carefully, and caveat emptor on this foreclosure pitfall. It’s a doozie.

I’ll continue the series with future posts on these other critical risks:

- Lack of control over turnaround and the dependent risks it creates for buyers (and not just your move date)

- Inspections, repairs, and warranties

- Financing complications (Don’t rely on using an FHA loan!)

- Title and deed issues

- Condo/HOA docs

Have another risk you want addressed? Add it in the comments and I’ll write about it.

Are you thinking about buying a foreclosure and want to know the risks you’ll face? Contact me to discuss the risks and some mitigation strategies.

Read the second post in the series, about the challenges in controlling the timing of a foreclosure transaction, here.

What is the State of The Housing Market? (Multiple Choice)

What is the State of the Housing Market? Please choose the best answer.

A. Looks like the start of a recovery. NAR Q3 2007 Report indicates roughly half of US markets show an increase in median home prices.

B. About flat, plus or minus 1%...OFHEO reports Home Prices down 0.4% in Q3 2007

C. We have years of decline ahead of us…start keeping cash--strike that, better make it Euros--in your mattress, folks! Case Shiller reports “The Sky is Falling, The Sky is Falling!” (Ok, that wasn’t really a headline attributed to them, but that’s basically the message in all of their press releases…pick which ever press release you want.)

Ok, pencils down. You all get a gold star. No matter which one you choose, you're correct. Why? It comes down to the methodology.

The National Association of REALTORS® statistics captures the median value of home transactions that come from all of the Multiple Listing Services nationwide. They cover all home sales at all price points, and release data in a relatively timely manner.

OFHEO, the government agency that works with Fannie Mae and Freddie Mac, also releases its quarterly analyses. They cover 287 markets, but because they are primarily concerned with the conforming loan market, the track only resales that meet that criteria (until recently, loans under $417,000. See my post on Conforming Loan Limits.) It also includes refinancings, which arguably have more generous appraisals. FYI, OFHEO does typically include an attempt at reconciling their numbers to Case Shiller. Because CS is a privately owned index, the exact methodology is impossible to duplicate.)

Case-Shiller, which is probably the most widely quoted analysis, covers only 20 US markets BUT includes ALL price points and loan types—exotics, sub-prime, and limited documentation. Of course the 20 metro areas covered are very large ones, which typically have more expensive homes (anyone ever compare a 4BR colonial on an acre in North Arlington to a 4BR colonial on an acre in Cleveland?) It excludes 13 states completely and has limited information on 29 others—so incomplete or missing data from 42 states! It also weights transactions—a $700,000 home gets weighted twice as heavily in their index as a $350,000 home. But isn’t a 10% decline a 10% decline, regardless of the baseline? Apparently not.

Dramatic headlines sell papers--remember all the 2004-2005 headlines screaming Buy! Buy, Before You're Priced Out Forever! Doesn't sound like a great idea in hindsight, does it?) While I’m definitely not saying that those in the industry can’t spin stats better than a Maytag, I did find this little tidbit from the NAR pretty interesting:

“Another factor that rarely gets attention is that Dr. Shiller, a Yale professor, has a side business in Chicago. His index is used at the Chicago Mercantile Exchange for hedging housing futures values. The more hedging of bets that occur, the more profits go into Dr. Shiller’s bank account. And more hedging of the bets will take place if people believe there will be a crash in housing values. So naturally he has a financial incentive to “scare” the market.”

So what’s a buyer to do? Whom to believe? First, understand the methodology and if one matches up with your situation, pay closer attention to that one. Are you in one CS’s 20 markets and looking to use a no doc loan for a $600K home? CS may be the better measure for you. Are you looking to buy below $417,000? OFHEO may be a better report for you. Want the broadest measure possible? Use NAR. I find that with statistics, perception is reality, and no one calls a market bottom until it’s months behind us, and in the meantime, life goes on. If you’re buying a home, as opposed to an investment property, then do what's best for you, pick a time that works with your life, plan to stay there at least 3-5 years, and buy only what you can afford.

Read more: See my post from last year on Yes, the Market is Down 7% AND up 1%

Read more: from one of my favorite mortgage blogs on spin in the mortgage industry headlines: How Ignoring Adjectives Can Improve Your Understanding of Mortgages

Read more in the Carnival of Real Estate, which included this post. They make the extremely important observation that all real estate is local, so national trends don't mean very much in the first place! Read my posts making similar points here and here. This one is also interesting to look at the very different foreclosure stats, even from county to county, in our area.

Sign up for my newsletter to keep up with DC area trends

Sign up for a first time buyer seminar to learn more about the market

WSJ: "Beyond Auctions" Article on Buying Foreclosures

There's a fantastic article today online in the WSJ: "Beyond Auctions: Ways to Buy Foreclosed Homes."

It explains why there are actually very few bargains to be had in foreclosure auctions, and why buyers (especially first time buyers) need to instead focus on bank owned property (REO). There's a good list of do's and don'ts too. It goes on to say--and I find this to be true--that "Some of the banks will sit [on a property] until they hit their target number -- they may get 20, 30, 40 offers before they're ready to take one....Potential buyers should...put in a realistic bid. You can't expect to bid 50% of the asking price and hope to get it."

Of course there are tons of foreclosures in the Northern Virginia area as a whole, but painting the entire area with one brush stroke can be dangerous. Take a closer look at the foreclosure stats below.


















On the bottom, you can see where Washington, DC, falls compared to other major metropolitan areas. But even that average (about 88 per 10,000 homes) is misleading...Looking at the top part of the chart, I've broken it out by county. You can easily see that DC, Arlington, and Alexandria are a very different market than PG, Stafford, Loudoun, and PW. Are there parts of Arlington that have more foreclosures? Of course. But the moral of the story is to make your decisions based on your specific situation--where you want to live, what type of property you want, etc....and not by a perceived "bargains" of price or availability. You may be surprised at the details behind those "opportunities."

Read more: Blog Post - "I want to buy a foreclosure."

Data Source: GMU Center for Regional Analysis

Read more: Alexandria Real Estate News

Read more: Falls Church Real Estate News

Conforming Loan Limit Increase

In conjunction with the stimulus package on its way to the President's Desk, a new conforming loan limit is on its way in our area. The final legislation effectively limits the increase to certain high cost areas including California, Boston, NY, and metro DC. In our area, the limit will be $562,500, up from $417,000, for the remainder of 2008 only.

The impact of this generally will mean lower rates, and perhaps easier refinancing, for loans between the old limit and the new one. However, the actual rate differential between this new "tier" and "original" conforming loans (still below $417K) remains to be seen; the rates likely won't be equal because of some market constraints. Namely, the temporary nature and limited geography means lower volume and lower trading liquidity, which equals lower demand for these types of securities. So will it help? Yes. Dramatically? We'll see.

Read more: Why Didn't the Fed Cut Impact Mortgage Rates More?

Fed Rate Cut - Why Didn't Mortgage Rates Fall Much?

The Fed's emergency three-quarters of a point rate cut didn't have much impact on mortgage rates...or did it? Well, it did and it didn't (don't you love answers like that)? The bottom line is that the Fed Funds rate certainly impacts mortgage rates, but sometimes indirectly, and surprisingly, sometimes they can move in opposite directions! This is a very high level and over-simplified discussion of the whys and hows -- it's tough to fit this in to one post though, and I'm not a mortgage banker, so bear with me, and feel free to contact me directly if you want to discuss more. Here we go:

The Fed Funds Rate is the overnight borrowing rate between banks. Banks are required to have certain reserve funds at the Fed each night to cover their deposits (remember reading about the Depression and runs on banks?) Sometimes banks don't have the funds so they borrow from other banks who have excess funds. The rate is an important policy tool of the Fed--it helps keep the balance of economic growth vs inflation in check. That's the key trade-off that the rate helps control--if rates are too low, we'll get inflation. If rates are too high, it prohibits growth.

The FFR is a very short term rate (overnight), whereas mortgage rates are more aligned with longer term instruments like bonds. After all, a buyer is theoretically borrowing money for 30 years (the length of a mortgage, though the lenders all know that most borrowers sell or refinance long before that time.) Bond yields, which impact 30 year mortgages, are tied to long term investor market expectations.

So which loans does the FFR impact?

30 year fixed -- Not directly impacted, though they often move in tandem because of shared expectations about long term growth of the economy. But if the FFR drops too low and investors get too worried that it will result in inflation, then mortgage rates can actually move in the opposite direction.

ARM loans -- These are generally tied to short term (1 year) treasuries, and so likely are impacted by rate cuts, but only if it varies from what was "expected" (see more below).

HELOCS -- These are generally tied to the prime rate, which moves in step with the Federal Reserve.

Subprimes -- Depends what index it's tied to, but they are often tied to LIBOR. LIBOR rates have been falling this month.

How markets move after FFR changes depends on expectations; the Fed meets on a regular schedule and many pundits predict their every move, so there are expectations "built in" to interest rates. If the Fed acts "as expected", then there are minimal changes following an announcement. Yesterday's announcement was a surprise mostly in the timing--many pundits had already predicted a half point cut later in January. So the impact was not overly dramatic.

NB: Not covered in this post is the differences in impacts between "Jumbo" and "Conforming" loans -- the magic number there is $417,000 because that's the mandated upper limit of loans that Fannie and Freddie can purchase from banks and re-sell--with a guarantee--to investors, creating a very liquid secondary market. Liquidity and guarantees lowers risk for banks, which helps keep rates lower for buyers in that bracket.

Update: In conjunction with the just released stimulus package comes news that Congress is evaluating whether or not to raise that $417K limit to $625K. If implemented, this will do a ton to create more affordable mortgage options in the DC area...more to come.


Read more: How do Fed rate cuts affect adjustable mortgages?

Read more: A slightly dated article that still does a nice job explaining impacts on different mortgage types.