MAKING SENSE OF THE STORY FOR CONSUMERS:
The riskiest markets are those with high foreclosure rates, slow or no job growth, and a glut of homes on the market. Markets like Detroit, Cleveland, and Miami display all three characteristics.
By contrast, transactions are rising in San Diego, and that’s a good sign (assuming the increase is sustained). Rising transaction numbers may mean credit is becoming easier to come by and buyers are looking somewhat more favorably on the market. In fact, Forbes suggests prices also may begin to rise over the next six months. That’s because there usually is a lag between increases in transaction numbers and price increases.
The Forbes report also projects better times ahead for San Diego and Sacramento thanks to a 125 percent increase in Fannie Mae/Freddie Mac conforming loan limits. In San Diego, the report notes, 18 percent of the market will see improved lending conditions.
BUYERS WAITING FOR THE RECESSION to pass before getting into the market might not want to wait too long: Clive Granger, winner of the 2003 Nobel Prize in Economics and professor emeritus at UC San Diego, says the U.S. economy has been in a recession for about four months. He expects the current recession to last an additional 2-6 months, depending on what occurs in the housing and financial markets.
SINGLE FAMILY HOME STARTS will drop to their lowest level in 50 years this year, Freddie Mac Chief Economist Frank Nothaft told a lunch audience last week. That’s good news for resale housing, which has a lot of unsold inventory to work through before prices can begin to move up. He expects that life should begin to return to the housing sector late this year or early next but says prices may not recover significantly until 2010.
LOCAL MONTHLY STATS for March show that the most activity in the Santa Cruz County market was in the $600,000 price range with the listing ratio vs the selling ratio at <6.3%>. Following in second were homes in the $500,000 price range followed by homes priced over $1M. In addition, only 14% of those sold were short sales or bank owned and they were all under $500,000 and mistily in the Watsonville area.
----------------------------------------------------------------------
March Statistical Highlights for Single Family Homes:
* Inventory up 15.0% compared to March 2007, and increased7.6% from February 2008
* Sales down 46.3% compared to March 2007, but UP 2.8% from February 2008
* Days on the market increased to 113, month prior 107, prior year 86
* Median home price increased from prior month to $675,000, and decreased 9.9% from March 2007
* Sales price vs.listing price ratio increased to 95.57% from February 2008
* 14.6 months of inventory available at the end of March as compared to 6.8 in March 2007
-----------------------------------------------------------------------
(These statistics are believed to be accurate but not guaranteed)
So what area of the market do you think is selling closer to listing price? Maybe you would be surprised to know it is the $900,000 price range, followed closely by $800,000 and the $700,000.
Thursday, April 10, 2008
Thursday, April 3, 2008
America's Riskiest Real Estate Markets
There's roulette and there's skydiving. Then there's investing in Detroit and Cleveland real estate. That's especially risky because those markets are in freefall. Lenders have fled, foreclosures are on the rise, homes aren't selling and local economies have stalled.
Given the state of the country's housing market, it wasn't hard to find others like them. To do so, Forbes.com looked at the country's 40 largest metros and combined data on foreclosures, from RealtyTrac, a foreclosure listing service; job growth from the Bureau of Labor Statistics; transaction volume data from Radar Logic, a New York real estate research firm; and vacancy and current inventory rates from the U.S. Census Bureau and ZipRealty, an aggregator of multiple listing service data.
The riskiest were those that had the highest foreclosure rates, slow job growth (or job loss) and a rash of listed homes. By these measures, Orlando has everything working against it. Other spots, Denver, for example, exhibit negative characteristics like foreclosures, lending problems and vacancies, but are adding jobs, a sign that the local economy can better handle these difficulties.
Risky Business
Before "write-down" entered the national lexicon, the biggest risk facing real estate markets was the prevalence of subprime loans and adjustable rate mortgages. Last year, before the shoe-drop of the credit crunch and the dropping value of banks' loans and debt, we identified ARM-heavy Miami, Fla., Orlando, Fla., and Sacramento, Calif., as the markets most at risk of further fall.
Subprime still matters, as do the concentration of adjustable rate mortgages. Transaction volume, however, especially over the next 12 months is becoming an increasingly important gauge of a market's health. This month the National Association of Realtors reported that sales volume of existing homes was up 2.9%, the first such month-to-month rise since July.
In cities like San Diego, one of five major metros where transactions rose, that's good news, assuming it's sustained. What makes transaction volume a good indicator is that it shows how easy it is for people to get loans and how much confidence there is in the market. If mortgages are available and buyers have some faith in the value of the home, they're more likely to buy.
San Diego's present conditions suggest that over the next half-year, prices may start to rise. That's because "there's usually a three- to six-month lag between when transactions go up and prices go up," says Jonathan Miller, president of Miller Samuel, a Manhattan real estate appraisal firm.
Another good sign for the coming year? Increased credit availability. We took into account increased Fannie Mae and Freddie Mac (GSE) loan limits. The new legislation will open up credit in markets such as Sacramento and San Diego by boosting the GSE loan limit by 125% of the median price. That's a huge deal for San Diego, where 18% of the market will see improved lending conditions, based on projections by Radar Logic, a New York-based real estate research firm.
Not as fortunate are hard-hit foreclosure markets such as Denver, which saw 50,000 foreclosure filings last year, according to RealtyTrac, which comes out to a 2.6% foreclosure rate, ninth in the nation behind the likes of Las Vegas and Detroit. Here, GSE loan limits won't change to boost liquidity, though at the beginning of this year the local economy had added jobs at a rate of 2%, which is triple the national average, according to the Bureau of Labor Statistics.
The availability of jobs gets at the critical question of how much money is available within a market. A market with money on the sidelines has better recovery prospects because it means potential buyers are out there. A market without economic activity to generate buyers is simply sinking.
"People aren't pulling the trigger right now," says Steve Cesinger, vice-chairman at Dewberry Holdings, an Atlanta-based real estate investment group. "But it's a big difference if they're not pulling the trigger because the prices haven't declined enough or because they're waiting to catch the bottom."
Matt Woolsey, Forbes Magazine, 03.31.08, 10:30 AM ET
Given the state of the country's housing market, it wasn't hard to find others like them. To do so, Forbes.com looked at the country's 40 largest metros and combined data on foreclosures, from RealtyTrac, a foreclosure listing service; job growth from the Bureau of Labor Statistics; transaction volume data from Radar Logic, a New York real estate research firm; and vacancy and current inventory rates from the U.S. Census Bureau and ZipRealty, an aggregator of multiple listing service data.
The riskiest were those that had the highest foreclosure rates, slow job growth (or job loss) and a rash of listed homes. By these measures, Orlando has everything working against it. Other spots, Denver, for example, exhibit negative characteristics like foreclosures, lending problems and vacancies, but are adding jobs, a sign that the local economy can better handle these difficulties.
Risky Business
Before "write-down" entered the national lexicon, the biggest risk facing real estate markets was the prevalence of subprime loans and adjustable rate mortgages. Last year, before the shoe-drop of the credit crunch and the dropping value of banks' loans and debt, we identified ARM-heavy Miami, Fla., Orlando, Fla., and Sacramento, Calif., as the markets most at risk of further fall.
Subprime still matters, as do the concentration of adjustable rate mortgages. Transaction volume, however, especially over the next 12 months is becoming an increasingly important gauge of a market's health. This month the National Association of Realtors reported that sales volume of existing homes was up 2.9%, the first such month-to-month rise since July.
In cities like San Diego, one of five major metros where transactions rose, that's good news, assuming it's sustained. What makes transaction volume a good indicator is that it shows how easy it is for people to get loans and how much confidence there is in the market. If mortgages are available and buyers have some faith in the value of the home, they're more likely to buy.
San Diego's present conditions suggest that over the next half-year, prices may start to rise. That's because "there's usually a three- to six-month lag between when transactions go up and prices go up," says Jonathan Miller, president of Miller Samuel, a Manhattan real estate appraisal firm.
Another good sign for the coming year? Increased credit availability. We took into account increased Fannie Mae and Freddie Mac (GSE) loan limits. The new legislation will open up credit in markets such as Sacramento and San Diego by boosting the GSE loan limit by 125% of the median price. That's a huge deal for San Diego, where 18% of the market will see improved lending conditions, based on projections by Radar Logic, a New York-based real estate research firm.
Not as fortunate are hard-hit foreclosure markets such as Denver, which saw 50,000 foreclosure filings last year, according to RealtyTrac, which comes out to a 2.6% foreclosure rate, ninth in the nation behind the likes of Las Vegas and Detroit. Here, GSE loan limits won't change to boost liquidity, though at the beginning of this year the local economy had added jobs at a rate of 2%, which is triple the national average, according to the Bureau of Labor Statistics.
The availability of jobs gets at the critical question of how much money is available within a market. A market with money on the sidelines has better recovery prospects because it means potential buyers are out there. A market without economic activity to generate buyers is simply sinking.
"People aren't pulling the trigger right now," says Steve Cesinger, vice-chairman at Dewberry Holdings, an Atlanta-based real estate investment group. "But it's a big difference if they're not pulling the trigger because the prices haven't declined enough or because they're waiting to catch the bottom."
Matt Woolsey, Forbes Magazine, 03.31.08, 10:30 AM ET
Sunday, March 23, 2008
How home prices faired in 20 markets in 2007
National home prices fell 8.9% in the full-year 2007, according to figures released recently by the Standard & Poor's/Case-Shiller Home Price Index.
"Wherever you look things look bleak," says Robert J. Shiller, chief economist at MacroMarkets LLC, which recently sold its rights in the indices.
Of the top 20 markets tracked by the index, 17 of the metro areas reported annual price declines and the remaining three reporting flat or moderate growth rates. Also 14 of the metro areas are reported record lows and eight are in double-digit decline.
Here's a look at these markets:
"Wherever you look things look bleak," says Robert J. Shiller, chief economist at MacroMarkets LLC, which recently sold its rights in the indices.
Of the top 20 markets tracked by the index, 17 of the metro areas reported annual price declines and the remaining three reporting flat or moderate growth rates. Also 14 of the metro areas are reported record lows and eight are in double-digit decline.
Here's a look at these markets:
Thursday, March 6, 2008
Santa Cruz County Real Estate Report for March 2008
NEW HOME CONSTRUCTION DOWN 62%
New home construction starts in California fell 62% in January as homebuilders continued to cope with slow sales and the ongoing credit crisis, according to the latest data from the California Building Industry Association (CBIA). CBIA Chief Economist Alan Nevin said the drop in new residential projects breaking ground coupled with the ongoing push to move existing inventories, carry the potential to produce a 'severe shortage' of new housing once the real estate market rebounds.
INTEREST RATES ON LONG-TERM, fixed, and adjustable mortgages are at historically low levels. The Fed st arted cutting interest rates to bolster the economy in September, and recently has turned much more aggressive. In eight days in January, the Fed slashed rates by 1.25 percentage points — the biggest single-month reduction in a quarter-century. Since September, the Fed has cut its federal funds rate - what banks charge each other on overnight loans - by 2.25 percentage points to 3 percent. It also cut its discount rate on direct loans it makes to banks by 1.75 points to 3.5 percent. Rates are expected to move lower at the Fed's next meeting on March 18.
RATES MAY SHRINK ON JUMBO MORTGAGES. Homeowners and homebuyers who live in expensive housing markets may be pleased to learn that the federal government recently increased the size of mortgages that Fannie Mae and Freddie Mac can purchase and the Federal Housing Administration, or FHA, can insure. The higher loan limits are expected to help people in high-cost housing markets buy homes and refinance existing mortgages, though the extent of such aid won't be assured until the new programs are put into place.
The law instructed HUD to publish the new conforming and FHA loan limits for each county within 30 days after President Bush signed the legislation, which would set a March 14 deadline. Until then, it's nearly impossible to pinpoint the limits for each county because the law is very technical and HUD hasn't yet said which data source it will use to set the median home prices.
LOCAL MONTHLY STATS are out and show a continued decrease in the number of sales. The good news is that sales were up from January and most agents in the know agree there has been an upturn in the activity. Personally, I am seeing those who have been looking for some time getting more serious. In all honesty, it is a great time to buy. No matter where you choose to invest, the market is exce ptional and presents an opportunity long overdue.
----------------------------------------------------------------------
February Statistical Highlights for Single Family Homes:
* Inventory up 20.9% compared to February 200 7, and increased 6.2% from January 2008
* Sales down 44.5% compared to February 2007, but UP 16.4% from January 2008
* Days on the market decreased to 107, month prior 145, prior year 129
* Median home price decreased from prior month to $664,000, and decreased 7.5% from February 2007
* Sales price vs.listing price ratio decreased to 94.83% from January 2008
* 13.9 months of inventory available at the end of February as compared to 6.4 in February 2007, but down from January 2008
-----------------------------------------------------------------------
(These statistics are believed to be accurate but not guaranteed)
Here is an interesting stat: In February of 2007 only 7.3% of the sales were under $500,000 as compared to February 2008 at 17.5%. In addition, there were 79 active listings under $500,000 at the end of February 2007 and currently there are 295. The saga continues...........
New home construction starts in California fell 62% in January as homebuilders continued to cope with slow sales and the ongoing credit crisis, according to the latest data from the California Building Industry Association (CBIA). CBIA Chief Economist Alan Nevin said the drop in new residential projects breaking ground coupled with the ongoing push to move existing inventories, carry the potential to produce a 'severe shortage' of new housing once the real estate market rebounds.
INTEREST RATES ON LONG-TERM, fixed, and adjustable mortgages are at historically low levels. The Fed st arted cutting interest rates to bolster the economy in September, and recently has turned much more aggressive. In eight days in January, the Fed slashed rates by 1.25 percentage points — the biggest single-month reduction in a quarter-century. Since September, the Fed has cut its federal funds rate - what banks charge each other on overnight loans - by 2.25 percentage points to 3 percent. It also cut its discount rate on direct loans it makes to banks by 1.75 points to 3.5 percent. Rates are expected to move lower at the Fed's next meeting on March 18.
RATES MAY SHRINK ON JUMBO MORTGAGES. Homeowners and homebuyers who live in expensive housing markets may be pleased to learn that the federal government recently increased the size of mortgages that Fannie Mae and Freddie Mac can purchase and the Federal Housing Administration, or FHA, can insure. The higher loan limits are expected to help people in high-cost housing markets buy homes and refinance existing mortgages, though the extent of such aid won't be assured until the new programs are put into place.
The law instructed HUD to publish the new conforming and FHA loan limits for each county within 30 days after President Bush signed the legislation, which would set a March 14 deadline. Until then, it's nearly impossible to pinpoint the limits for each county because the law is very technical and HUD hasn't yet said which data source it will use to set the median home prices.
LOCAL MONTHLY STATS are out and show a continued decrease in the number of sales. The good news is that sales were up from January and most agents in the know agree there has been an upturn in the activity. Personally, I am seeing those who have been looking for some time getting more serious. In all honesty, it is a great time to buy. No matter where you choose to invest, the market is exce ptional and presents an opportunity long overdue.
----------------------------------------------------------------------
February Statistical Highlights for Single Family Homes:
* Inventory up 20.9% compared to February 200 7, and increased 6.2% from January 2008
* Sales down 44.5% compared to February 2007, but UP 16.4% from January 2008
* Days on the market decreased to 107, month prior 145, prior year 129
* Median home price decreased from prior month to $664,000, and decreased 7.5% from February 2007
* Sales price vs.listing price ratio decreased to 94.83% from January 2008
* 13.9 months of inventory available at the end of February as compared to 6.4 in February 2007, but down from January 2008
-----------------------------------------------------------------------
(These statistics are believed to be accurate but not guaranteed)
Here is an interesting stat: In February of 2007 only 7.3% of the sales were under $500,000 as compared to February 2008 at 17.5%. In addition, there were 79 active listings under $500,000 at the end of February 2007 and currently there are 295. The saga continues...........
FED CALLS FOR MORE AGGRESSIVE PLAN TO AID DISTRESSED HOMEOWNERS
Fed Chairman Ben S. Bernanke yesterday called for a more aggressive response to the nation's housing and foreclosure crisis, suggesting that lenders do more to help struggling homeowners avoid foreclosure and, in turn, help stave off further erosion of home prices in distressed areas and the broader economy.
"This situation calls for a vigorous response," Bernanke said. "Measures to reduce preventable foreclosures could help not only stressed borrowers but also their communities and, indeed, the broader economy. At the level of the individual community, increases in foreclosed-upon and vacant properties tend to reduce house prices in the local area, affecting other homeowners and municipal tax bases."
"This situation calls for a vigorous response," Bernanke said. "Measures to reduce preventable foreclosures could help not only stressed borrowers but also their communities and, indeed, the broader economy. At the level of the individual community, increases in foreclosed-upon and vacant properties tend to reduce house prices in the local area, affecting other homeowners and municipal tax bases."
Sunday, March 2, 2008
Practical information to help you navigate today's real estate market
* Interest rates on long-term, fixed, and adjustable mortgages are at historically low levels. The Fed started cutting interest rates to bolster the economy in September, and recently has turned much more aggressive. In eight days in January, the Fed slashed rates by 1.25 percentage points — the biggest single-month reduction in a quarter-century. Since September, the Fed has cut its federal funds rate - what banks charge each other on overnight loans - by 2.25 percentage points to 3 percent. It also cut its discount rate on direct loans it makes to banks by 1.75 points to 3.5 percent. Rates are expected to move lower at the Fed's next meeting on March 18. Despite all this, mortgage rates are starting to creep up. Consumers should lock in low rates now, before they go higher.
* With more homes on the market for longer periods of time, buyers have more choices when it comes to selecting a home today.
* The foreclosure crisis has motivated the government to create more consumer protections against predatory lenders than previously existed.
* A temporary increase in the conforming loan limit means consumers should soon be able to borrow at lower interest rates for higher-priced homes. Prior to the increase, the conforming loan limit was $417,000. The spread between jumbo, or non-conforming mortgage loans and conforming mortgages is about 1.2 percentage points.
* With more homes on the market for longer periods of time, buyers have more choices when it comes to selecting a home today.
* The foreclosure crisis has motivated the government to create more consumer protections against predatory lenders than previously existed.
* A temporary increase in the conforming loan limit means consumers should soon be able to borrow at lower interest rates for higher-priced homes. Prior to the increase, the conforming loan limit was $417,000. The spread between jumbo, or non-conforming mortgage loans and conforming mortgages is about 1.2 percentage points.
Sunday, February 24, 2008
Banks Freeze Homeowners Credit Lines
AS REAL ESTATE VALUES DROP, LIMITS PUT ON EQUITY LOANS
Bay Area residents accustomed to treating their homes like piggy banks could be in for unpleasant surprises as home prices decline in many areas. Not only are banks less willing to issue popular home-equity lines of credit, but some of the nation's biggest lenders are freezing existing loans.
Countrywide Home Loans, for example, has sent letters to at least 122,000 homeowners nationwide informing them they can no longer draw on their home-equity lines of credit. Many homeowners rely on these pay-as-you-use-them loans to finance things like remodeling or college tuition, or to use for emergency expenses.
Morgan Hill homeowner Kelly Urbina received a letter from Countrywide two weeks ago telling her she can no longer access the credit line that she says the lender encouraged her to get when she bought her three-bedroom home in 2006.
"I still have a substantial amount of equity in my property, so I was surprised to get a letter that just said, 'We're going to suspend your line,' " said Urbina, who works as an underwriter for Opes Advisors, a mortgage banking and wealth management firm in Palo Alto. She knows the value of her property has dropped somewhat, but not "significantly," as Countrywide claimed in the letter.
She and her husband used some of the equity line to remodel their kitchen two years ago, but otherwise have reserved it for emergency use. Urbina said she was surprised the lender didn't simply lower the amount of her line of credit, rather than suspend it. "I would have felt that was a very fair thing to do," she said.
Beginning of freeze
Chase and Washington Mutual also have frozen the home-equity lines of a much smaller number of customers in response to falling home values, said officials with the two banks. Wells Fargo said it "has not made large-scale decisions to restrict line-of-credit access for all customers in markets with declining real estate," but is reviewing its home-equity customers' accounts more frequently than in past years.
"Everybody's going to have to do it," said Guy Cecala, publisher of Inside Mortgage Finance. "We're just at the beginning of this trend of lenders freezing home-equity lines of credit."
Countrywide, which is being acquired by Bank of America after incurring huge losses because of its subprime lending, would not specify in which states or areas homeowners were most likely to have received the letters.
Because median home prices in Silicon Valley have held up better than in many parts of California, it's unlikely that a large chunk of the letters went to local homeowners. But mortgage experts say plenty of Bay Area homeowners potentially could get the same kind of news from their lenders if their equity lines of credit were generous and they did not have much equity in their homes to begin with - or if home values in the valley drop more steeply.
"It very much could hit people up here - whether it be Countrywide or another lender - where values have come down," said John Conover, president of Borel Private Bank in San Mateo. "This is a significant issue for people who expect to be able to borrow on their loans."
How equity works
Nationwide, homeowners borrowed $355 billion worth of home-equity loans and lines of credit in 2007, down from $430 billion in 2006, according to Inside Mortgage Finance. California borrowers make up 20 percent to 25 percent of the market.
Equity is a property's market value minus the owner's mortgage debt. So, for a home worth $700,000, if the owner has a $500,000 mortgage, he or she has equity of $200,000, or about 29 percent.
Until recently, some lenders were willing to make a combination of mortgages and equity lines of credit up to 100 percent of the home's value. So the homeowner in the example above could have gotten a home-equity line of $200,000 in addition to the $500,000 mortgage, bringing the debt obligation up to $700,000.
But with home values falling and credit markets still crunched, lenders have narrowed their lending criteria. Few will extend credit past 80 percent of a home's value now. That would cut that homeowner's equity line to $60,000, resulting in a total of $560,000 in mortgage debt.
Lower values
Lenders' changes amount to a sort of hedge against the possibility of further price declines. "Across the board, every lender has been tightening up their guideline with regard to home-equity lines," said Mike Gallagher, president of mortgage broker Avantis Capital in Morgan Hill.
Countrywide cited falling property values as the reason for shutting off so many customers' access to their equity, though lenders also can restrict borrowers' access to their credit lines for other reasons, such as deteriorating credit scores.
Experts called Countrywide's mass mailing to freeze home-equity lines unusual, but noted that in a declining market, lenders need to protect themselves from avoidable losses.
Susan McHan, president of Opes Advisors and homeowner Kelly Urbina's employer, said her company has at least two clients in the East Bay who have received the letters from Countrywide. In both cases, she said, the homeowners dispute that their home values have fallen sharply, and they are working with Countrywide to try to reopen their credit lines. "They had plans that they were going to be using the loans for," McHan said. Her company has notified other clients of the new climate in home-equity lending.
"Anybody who had an equity line of 90 percent or above, we definitely sent letters warning them" that their lenders might suspend their credit lines in the future.
As for Urbina, she was not counting on using her equity line soon, but she likes having one. "What if I did have an emergency and I needed the line?" she said.
________________________________________
Contact Sue McAllister at smcallister@mercurynews.com or (408) 920-5833.
Bay Area residents accustomed to treating their homes like piggy banks could be in for unpleasant surprises as home prices decline in many areas. Not only are banks less willing to issue popular home-equity lines of credit, but some of the nation's biggest lenders are freezing existing loans.
Countrywide Home Loans, for example, has sent letters to at least 122,000 homeowners nationwide informing them they can no longer draw on their home-equity lines of credit. Many homeowners rely on these pay-as-you-use-them loans to finance things like remodeling or college tuition, or to use for emergency expenses.
Morgan Hill homeowner Kelly Urbina received a letter from Countrywide two weeks ago telling her she can no longer access the credit line that she says the lender encouraged her to get when she bought her three-bedroom home in 2006.
"I still have a substantial amount of equity in my property, so I was surprised to get a letter that just said, 'We're going to suspend your line,' " said Urbina, who works as an underwriter for Opes Advisors, a mortgage banking and wealth management firm in Palo Alto. She knows the value of her property has dropped somewhat, but not "significantly," as Countrywide claimed in the letter.
She and her husband used some of the equity line to remodel their kitchen two years ago, but otherwise have reserved it for emergency use. Urbina said she was surprised the lender didn't simply lower the amount of her line of credit, rather than suspend it. "I would have felt that was a very fair thing to do," she said.
Beginning of freeze
Chase and Washington Mutual also have frozen the home-equity lines of a much smaller number of customers in response to falling home values, said officials with the two banks. Wells Fargo said it "has not made large-scale decisions to restrict line-of-credit access for all customers in markets with declining real estate," but is reviewing its home-equity customers' accounts more frequently than in past years.
"Everybody's going to have to do it," said Guy Cecala, publisher of Inside Mortgage Finance. "We're just at the beginning of this trend of lenders freezing home-equity lines of credit."
Countrywide, which is being acquired by Bank of America after incurring huge losses because of its subprime lending, would not specify in which states or areas homeowners were most likely to have received the letters.
Because median home prices in Silicon Valley have held up better than in many parts of California, it's unlikely that a large chunk of the letters went to local homeowners. But mortgage experts say plenty of Bay Area homeowners potentially could get the same kind of news from their lenders if their equity lines of credit were generous and they did not have much equity in their homes to begin with - or if home values in the valley drop more steeply.
"It very much could hit people up here - whether it be Countrywide or another lender - where values have come down," said John Conover, president of Borel Private Bank in San Mateo. "This is a significant issue for people who expect to be able to borrow on their loans."
How equity works
Nationwide, homeowners borrowed $355 billion worth of home-equity loans and lines of credit in 2007, down from $430 billion in 2006, according to Inside Mortgage Finance. California borrowers make up 20 percent to 25 percent of the market.
Equity is a property's market value minus the owner's mortgage debt. So, for a home worth $700,000, if the owner has a $500,000 mortgage, he or she has equity of $200,000, or about 29 percent.
Until recently, some lenders were willing to make a combination of mortgages and equity lines of credit up to 100 percent of the home's value. So the homeowner in the example above could have gotten a home-equity line of $200,000 in addition to the $500,000 mortgage, bringing the debt obligation up to $700,000.
But with home values falling and credit markets still crunched, lenders have narrowed their lending criteria. Few will extend credit past 80 percent of a home's value now. That would cut that homeowner's equity line to $60,000, resulting in a total of $560,000 in mortgage debt.
Lower values
Lenders' changes amount to a sort of hedge against the possibility of further price declines. "Across the board, every lender has been tightening up their guideline with regard to home-equity lines," said Mike Gallagher, president of mortgage broker Avantis Capital in Morgan Hill.
Countrywide cited falling property values as the reason for shutting off so many customers' access to their equity, though lenders also can restrict borrowers' access to their credit lines for other reasons, such as deteriorating credit scores.
Experts called Countrywide's mass mailing to freeze home-equity lines unusual, but noted that in a declining market, lenders need to protect themselves from avoidable losses.
Susan McHan, president of Opes Advisors and homeowner Kelly Urbina's employer, said her company has at least two clients in the East Bay who have received the letters from Countrywide. In both cases, she said, the homeowners dispute that their home values have fallen sharply, and they are working with Countrywide to try to reopen their credit lines. "They had plans that they were going to be using the loans for," McHan said. Her company has notified other clients of the new climate in home-equity lending.
"Anybody who had an equity line of 90 percent or above, we definitely sent letters warning them" that their lenders might suspend their credit lines in the future.
As for Urbina, she was not counting on using her equity line soon, but she likes having one. "What if I did have an emergency and I needed the line?" she said.
________________________________________
Contact Sue McAllister at smcallister@mercurynews.com or (408) 920-5833.
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