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August 19, 2007

Here in Los Gatos and in Silicon Valley, Countrywide is a mortgage company – it sells loans. You don’t see Countrywide Bank on street corners here or anywhere in northern California. Recently the lending institution, Countrywide, known to all of us, was “downgraded” and some economists are not seeing a cheery future for that company. Last week, the LA Times wrote that it went from bad to worse as there was a bit of a run on Countrywide bank in southern California. Public vote: no confidence.

How can that impact you?

Countrywide is the largest provider of home loans in the nation. It is having to make fewer and fewer loans (more so now that it had to borrow money to cash out some customers). In short, the money supply is tightening – even more.

With real estate, it is all about supply and demand. Home buyers are really purchasing both a home and a loan (in my career I’ve worked with two “all cash” buyers in 14.5 years). When the money supply shrinks, it gets more expensive. When loans become increasingly costly, it puts pressure on housing prices. Think of it as the balance scales – to a degree, if one side goes down, the other goes up. If interest rates go up, prices may come down. (So buyers who are waiting for homes to become cheaper, take note that if they do, your loan will likely cost more – savings not guaranteed.)

Most recently, the subprime mortgage mess has impacted first time homebuyers and low income buyers the most. In the last several years, very few first time home buyers have been buying with 20% down. It’s too hard to save that much money, especially as prices have risen much faster than a buyer’s ability to save.

So what we’ve been seeing is that now move-up homes are selling much better than entry-level homes because those 100% loans are so hard to come by. East San Jose, which has more affordable housing, has been very adversely impacted by the loan fallout and houses there are generally “sitting” and not selling.

So back to you. How does this impact you, if you are buying or selling a home today?

Lenders are nervous. They are making the loan process a lot more difficult and time consuming as they scrutinize every buyer to make sure that he or she is a good risk. It used to be easy, with a pre-approved buyer, to get the final loan approval within a week. No more. Allow a few extra days.

If you are selling, understand that even with a pre-approval, your buyer may need an extra day, two or three. If you are buying, get everything to your lender on double time. If you are not yet in contract to purchase a home, be sure you’ve cleaned up your credit, don’t make any big purchases, and do your level best to assemble 20% down (which has to be “seasoned” in your bank 3 months for the lender to count it).

If you do not have 20% down, you are at risk for the lender to change its mind, even if you are preapproved and ready to close escrow soon. In recent weeks, I’m hearing from other agents that fully pre-approved buyers have had their loans rescinded. Why? How? The lender decides that the buyer is too much a risk – finds a technicality and backs out a few days before closing.

My advice is to “double-ap” the loan. Submit it both with the lender who’s promising the better rate AND one who’s more of a sure deal (even if at a higher rate). Think of it like college applications: you apply to the school that’s a sure thing, that’s a probable thing, and a stretch – because you don’t want to be without a school when September rolls around.

First time buyer? Getting an 80% first, 10% second and 10% down loan is not the easy approach it was awhile ago. If you have parents who are offering to lend you part of the downpayment, talk with your mortgage broker about this option. For many, the door is closing on 80/80/10s just as it has on other less-than-conventional loans. Home sellers will feel better knowing that you have 20% or more because you are less likely to have your loan withdrawn.

This has been a rough week in the financial market. The Federal Reserve cut interest rates on Friday to its Discount Rate by 1/2% in an effort to help. Was it enough? No one knows right now. Things are jittery all over.

I remember, as a teen, my mother (a Realtor) selling homes when interest rates were 18%. It wasn’t fun, but somehow people did still buy and sell. When Jim and I bought our first home in 1989, we had an interest rate of 10.25% and paid 2 points to buy it down that far. We still bought, and so did everyone else. Houses were cheaper then, but the money wasn’t.

My final words? If you are ready to buy, buy now – if the economy gets rocked, interest rates will rise and no matter how cheap the housing may get, your loan then will likely eat any difference. If you own your home free and clear, you might consider selling now, and maybe offering to carry some or all of the mortgage. If you can provide some financing, buyers will flock to your home.

Want to buy a home? Save, save, save. My lender friend, Debi Merchain, calls it “power saving”. In this kind of market, the old adage is really true: cash is king.