According to 2012 data, condominium values in Boston crossed a record high level during the 2nd and 3rd quarter with an overwhelming supply of eager buyers who drove up sales. The median price of condominiums in Boston neighborhoods like the Fenway, Beacon Hill, South Boston, and the North End, rose to approximately $520,000 during the second quarter of 2012 – this figure topped the previous peak set before the financial crisis hit the US.

The price increase contributes to the fact that the housing market within Massachusetts is gradually mending and this is nothing but a positive note for the Boston real estate market. As more and more buyers jump into the Boston condo market, so too is there an increase in mortgage needs.

However, on an unfortunate note, borrowers in Boston run into two common problems when attempting to purchase a condo

1. Strict lending standards
2. Above average home values

These two aforementioned items beset the prospective buyers as well as Boston condo owners who wish to refinance their existing loans.

Tight Boston Condominium Lending Rules

Mortgage brokers who are involved in the core business of condominium lending, are of the opinion that the biggest reason real estate transactions fall apart is due to financing. Even with pre-approvals, a large down payment, and stellar credit ratings, there are borrowers who are finding it tough to close the deal on a condo mortgage loan.

Both Fannie Mae and Freddie Mac have tightened the condominium borrowing regulations in order to limit “risky lending” that might lead to increased levels of foreclosure. Exuberant condo HOA fees have been shown to cause borrower default.

Unfortunately, the majority of the real estate market in downtown Boston is comprised of condominiums. Single family homes are quite rare in the city center, and are quite costly even if they do exist

Another FHA regulation affecting the condo mortgage lending market, including impacts to projects like W Boston, The 1850, and FP3, states that 72% of the condominium development should be sold or under agreement to people who are planning to occupy the units as a primary residence – the FHA believes that it is a development with this owner mix and structure that will make it successful (financially) in the long run. Further, Private Mortgage Insurance (PMI) companies who previously insured loans of greater than 80% are now asking for a minimum of 10-15% down on loans.

All the aforementioned regulations have restricted the buying power of prospective condominium buyers. Consider your financial outlook before buying a Boston condo so that you don’t make missteps that can boomerang in the long run. Shop various mortgage lenders so as to choose the best loan in the market and a loan with the most competitive rate that best meets your personal situation.

With the US bailing out Fannie and Freddie in 2008 to the tune of some $250 billion, adding to the $40 trillion+ net worth of the country, many would like to see these quasi government entities done away with all together.  But what consequences and repercussions would that have on the housing market, and the American way of life for that matter?

What do Freddie Mac and Fannie Mae actually do?  Their purpose lies in creating a secondary mortgage market, in its simplest terms, so that that loan originators do not have to carry loans on their own books, freeing them up to extend loans to others.

In a recent Fortune magazine article entitled Fixing the Mortgage Mess, Wells Fargo CEO John Stumpf articulates that if we were to do away with Fannie and Freddie, we’d be transported back to to 1976 when he first purchased a home, struggling to find a mortgage because banks did not have ample deposits on hand to provide loans.    There are approximately 76 million homes in the US today, and of those, 51 million have mortgages, which aggregates to approximately $11 trillion.  Banks simply don’t have the ability to burden that level of debt on their own, and therein lies the need for a secondary market facilitated by Fannie and Freddie.

While it’s a fact that a secondary mortgage market must exist for borrowing to be feasible and somewhat affordable for the masses (granted, it could be argued that lending to the masses is not an ideal we should strive for), that shouldn’t come without reasonable boundaries put in place to protect us from the same meltdown that occurred several years ago.  That is where Stumpf inserts what appear to be reasonable guidelines that might help right the ship so to speak.

First, all parties having financial skin the game.  With loan originators often not holding loans on their own books and exploiting the secondary market, this leaves the overall lending system exposed.  Some consequences of this may be higher down payments, and minimums for how much of a loan should be maintained in a lender’s portfolio.  Second, additional transparency and explicit clarity is needed in how any quasi government agencies operate, which would in turn lead to bolstered confidence and market liquidity.  And the third guideline that Stumpf highlights is uniform and consistent underwriting standard across the industry.  This latter point seems terribly obvious should we want to maintain any sort of health in the system on a long term basis as over time constituency groups tend to shirk responsibilities and test the boundaries.

So, should we aim to down Fannie and Freddie?  To support home ownership for a large percentage of the population, a secondary mortgage market in some form must exist, is it in Fannie and Freddie, that’s to be debated.

In today’s world where you are able to purchase everything from all season radial tires to downloading your favorite groups latest mp3 album, we have grown accustomed to making purchases online without a moment’s thought. And over the last few years this practice of making online purchases has opened up more and more people to identity theft.

Identity theft occurs when someone is able to access another’s credit information, and uses this information to make unauthorized charges using that other person’s credit, without their prior knowledge. This is a crime whose statistics are staggering to say the least as it was reported that more than 10 million Americans were the victims of identity theft between 2008 through 2009. When someone’s identity has been stolen there are many consequences that become attached to this crime which can adversely affect the victim. One way of fighting identity theft is through the process of freezing your credit.

When you are the person who is the victim of identity theft, and you have decided that freezing your credit is your only avenue for recourse, there are a few things that have to happen. First you need to understand what freezing one’s credit actually means. The process of a credit freeze, also known as a “security freeze” involves a person working with all of the recognized credit reporting agencies and having their credit information locked or frozen so that if someone were to try to use your credit, it cannot happen if the action has to be accomplished by it being reported to one of the credit reporting agencies. Once you have decided to go with this course of action, either a password or a pin number will be established and this is for the purpose of your being able to either temporarily lift the freeze or permanently have it removed.

The problem is that this solution can become a double edged sword. On the one hand you have essentially stopped anyone including a credit card company from being able to take a look at your credit history and information. This makes it difficult for a credit card company to issue a credit card in your name, so someone attempting to fraudulently have a credit card issued in your name will not be able to do this, but it also means that while the freeze is active you will not be able to get a credit card either. And for someone who is trying to re-establish their credit history, this makes that a pretty tough thing to do. And another issue arises when your address and or your name needs to be updated. These two things usually happen automatically when either occurs, but with your credit information frozen, you will have to do some extra leg work and do it manually. All three of the reporting credit services, Experian, Equifax and Trans Union have been on board with the practice of credit freezes for several years now. Each of these credit reporting agencies have different fees associated with this service which usually range from $5 to $10 dollars but in a few states can run as high as $20 dollars.

The other thing that freezing your credit does not accomplish is limiting someone from attempting to commit identity fraud by using your already established accounts including any non-credit checking accounts, savings accounts and any established credit card accounts, but if you suspect that someone has or is using your identity and committing identity theft, it is still a prudent move on your part to contact the above mentioned credit reporting agencies and have them apply a credit freeze for you.

As you consider this information from the standpoint of purchasing a home, be aware that lending practices have become more stringent in the past several years, making it more difficult for buyers to secure mortgage financing on a home purchase, making it that much more important to maintain, and even grow, your credit score.

With the fallout of the U.S. recession that began at the end of 2007, credit standards have tightened making it more difficult for many home buyers to secure a home loan.  In some cases, borrowers have the income to cover their note and cash for a sizable down payment, but are still unable to secure a loan through conventional means for various reasons.  In these circumstances home buyers must often resort to high interest rate loans, come up with large down payments exceeding 20%, or forgo purchasing a home altogether.   Buyers often tend to give up at this point.  However, there is an additional option that is available to buyers given a willing seller.  This option is owner financing.

In the early 80’s interest rates reached a peak of 18%, making homes in their target price range unaffordable for many buyers due to the high interest payments, which required creative financing options to purchase a home.  Many sellers resorted to offering owner financing at lower interest rates in order to get their home sold.  In this environment owner financing often made sense to both sellers and buyers and as a result, owner financing was a common occurrence.

In today’s market the playing field has changed.  Interest rates are at low levels that have not been seen in decades, housing inventory is sky high, and home values are low.  On the surface this seems like the perfect time to buy a home.  However, the number of qualified buyers is down significantly due to the tightening of credit standards and the overall loss of people’s net worth due to the global economic meltdown.   As a result, many of those who need to sell their home are not able to secure a buyer and many of those who want to buy a home are not able to secure financing.

Although circumstances have changed since the early 80’s, the need of a buyer and seller to come up with creative financing options exists. The combination of continued tight credit standards, low home values, high inventory, and a struggling economy will only exacerbate the need for creative financing in the coming years.

Austin Texas REALTOR® Brian Talley of Regent Property Group LLC was recently faced with a financing challenge while working with a client he was helping find and purchase a home.  Brian explained, “My buyer was a doctor with 20% cash down and income to cover a note for a house they targeted to buy.  They were preapproved to purchase a home but after securing a purchase contract for a home they loved, the bank decided the buyer was too high of a credit risk and rejected the file.  Since the buyer had 20% cash down, we suggested that the buyer and seller consider owner financing.  At first the seller was hesitant to take this path, but they needed to sell so they entertained the option.  The buyer really liked the house and was willing to consider owner financing.  I connected both of them with a local third party Austin attorney and title agent that specializes in owner financing.  He explained the process and risks to the buyer and seller, and both decided that it made sense.”

Brian Talley went on to say, “The buyer offered a slightly higher price than the list price and a 20% down payment for a 2 year balloon loan.  The sellers would net a large amount of cash after paying closing costs to help them find alternative housing in the short term.  Once the buyer refinanced the home within the next two years the seller would receive the balance of their equity from the sale.  They both decided to proceed with the sale via owner financing.  Not only did the seller get the home sold only 7 days after the buyers initial conventional loan was rejected, the seller received a higher price for the house, paid less in closing costs, and got the home sold after sitting on the market for months.  Regarding the seller risks, if the buyer were to default on the loan then the seller would get the house back via foreclosure and the seller would get to keep the 20% down payment on the home.  The seller could then put the house back on the market with the chance of making even more money on another sale.  Meanwhile, the buyer was able to purchase the house they wanted at a fair price and can now take the time to sell an asset to come up with the cash to refinance.  It was a win-win.”

While not all circumstances are right for owner financing, it is a viable option that can be considered in today’s market.  With the prospect of increasing interest rates and a struggling economy in the future, the need for owner financing should only increase.  Unfortunately, many buyers and sellers are not aware of this option or may not understand it.  Simply understanding this option is a good start.  The first step is to connect buyers and sellers with a qualified professional and/or attorney that has experience handling owner financing transactions.  Once the process and risks are understood, buyers and sellers will be prepared to exercise this option if the right circumstances present themselves.

About the Author: Austin Luxury REALTOR® Brian Talley of Regent Property Group LLC, an expert in Lake Austin homes for sale and Austin luxury homes for sale.

Famous for its rich American history, sports and overall vitality, Boston is home to more than 30,000 civilian veterans. All of Massachusetts houses more than 425,000 veterans. Veterans who are considering purchasing a home in Massachusetts are entitled to the VA home loan program.

In the Bay State, VA uses two income qualifications to deem veterans eligible: debt-to-income ratio (DTI) and residual income. To qualify, a veteran’s total debt should not be more than 41 percent of his or her total income. The residual income requirement measures whether or not the borrowing veteran can cover daily living costs after taxes, housing, insurance and liabilities (e.g. credit card and car payments) have been made.

With the exception of seven counties with higher VA loan limits, Massachusetts’ counties’ limit is $417,000. Suffolk County, where Boston is, has a $475,000 maximum, and Nantucket’s ceiling goes up to $1,094,625. Qualified veterans can pay no money down to finance 100 percent of the lower of the selling price or appraised value.

In addition to the no money down, VA loan interest rates tend to be lower than those of conventional loans. VA guidelines in Massachusetts curb a handful of fees, such as underwriting and processing fees. Another fee that veterans can get waived is the VA funding fee, which supports VA loan guarantees. If they cannot get it waived, veterans in Massachusetts can finance the fee. Other advantages to VA loans include:

• No private monthly mortgage insurance
• In some cases, sellers paying the closing costs
• No penalty for making loan payments early
• Several refinancing options

The median cost of a single family home or condominium in downtown Boston during 2009 was approximately $475,000, and roughly $350,000 at the sate of Massachusetts level. That’s why the state’s VA loan limits balloon above the norm. But before veterans start looking at homes in Boston and its state, they should check their eligibility for a VA loan.

Veterans who meet one of the three following criteria may be eligible:

• Military members who’ve served 181 days on active duty or three months during war time
• People who have spent at least six years in the National Guard or Reserves
• Spouses of those killed in the line of duty

For more information on VA loans in Massachusetts, visit VAmortgagecenter.com.

The FDIC plans to auction more than $1 billion in assets seized from failed banks next month and this may require write-downs that weaken lenders nationwide. Note that 140 banks failed last year, 26 thus far in 2010, and as of December 2009, over 700 banks are on the FDIC’s watch list. You do the math.

Interestingly, retail sales are up for the third consecutive month, indicating that the worst may be over and an easing of fears about spending. Or, maybe we just can’t take it anymore and we are going to reward ourselves with new stuff; as job prospects still look bleak and personal income has actually shrunk when taking into account inflation.

On the local scene, the battle between the Mayor and the Developer regarding the former Filene’s site seems to be heating up – will be interesting to watch what develops. Can you force a developer to proceed when demand and financing are not available? Just look at values of commercial sites like 230 Congress Street, 10 Milk Street and, the XV Beacon Hotel.

According to a recent Business Week article, cash rich builders are buying land again at huge discounts in the hopes that the market for new homes will turn around soon (note homebuilding is at the lowest point since records have been kept). Of particular attraction are broken subdivisions where most of the infrastructure has been installed – someone’s problem is another’s opportunity.

Last but not least, out of Housing Zone ‘Does Green Help Sell Homes?’ the answer seems to be ‘yes’ but when you survey the major home builders, less than 1/3 are building certified green or high-performance homes and do not advertise these benefits. Is the buying public ahead of the curve on this issue?

New distressed debt numbers from the banking sector have recently been published, so it is time again to take a look at the 181 banks that make up our local lending landscape. There is a lot of talk about a very serious forthcoming correction in commercial real estate and the effects that this will have on our financial institutions. New numbers indicate, however, that Massachusetts lenders may be set to dodge this bullet… at least to some degree.

Overall, Massachusetts banks saw an increase in their distressed real estate balances of only about 5% Q2-Q3 2009. I don’t know if this sounds like a lot or a little to you, but  compared to the US totals at 11% its not too bad. Still, distress totals are up 72% over the last four quarters, not a confidence instilling figure.

This quarter is the first quarter that two Massachusetts banks are reporting capital adequacy numbers below those deemed healthy. In lay terms, capital adequacy has to do with the ratio of what you’ve got in the vault to what you’ve got on the street. Tier 1 + Tier 2 capital to risk weight adjusted assets should be no lower than 8%. One of these banks, Mt Washington Bank, recently announced a merger with East Boston Savings Bank, which, while reporting a little less than $20 Million in non-accrual loans and a little more than $2.5MM in (mostly construction) REO, is well capitalized reporting a ratio of 14% compared to Mt Washington’s 6%.

The other bank of note is Butler Bank. Butler reported capital adequacy ratios at 2% and 3%, a far cry from the 4% and 8% that regulators like to see. Butler’s construction portfolio has gone south at a rate of almost 40% (39.59%) and is by every measure the main source of their ills. It has been reported elsewhere that the bank is being closely monitored by the FDIC.

Overall Massachusetts banks saw the following changes from Q2 to Q3.

• 15% increase in residential distress mainly consisting of a big uptick in REO
• 3.26% increase in distressed multifamily
• Unchanged (virtually) commercial real estate distress
• Unchanged (less than 1%) construction distress

The distressed real estate totals are calculated by adding a banks 90+day late loans, non-accrual loans, and REO (bank owned property). It appears that we may be getting over the hump with construction loans both locally and nationally but that doesn’t mean that banks have dealt with the construction problems at hand only that most of the problems are already in the system. For example, while non-performing construction loans with Mass. banks fell by 2% to $222MM construction REO (bank owned) grew from $75.7MM to $84MM.

There are strong indicators that many, if not most, banks (with problems) are postponing inevitable losses as they move paper around internally. At some point that will have to stop and distressed properties will have to be sold. Today, Massachusetts-based banks are holding about $1.33 Billion in distressed real estate loans and property. About two-thirds of that is residential, construction, and multifamily while the balance is commercial. It’s important to remember that the numbers I’m giving you do not represent the whole of the distressed real estate market in Massachusetts. but only the numbers held at Massachusetts based banks. That means Bank of America, Citi, Deutsche Bank, and all of the largest lender’s numbers as well as mortgage backed securities are  unrepresented.

While the recession enders cheer positive signs in the stock market hailing the return of the bulls, everyone else seems to be wondering where the jobs are, and real estate industry folks are pointing at the long shadow being cast by the coming wave of commercial real estate problems. While there are no answers to the employment numbers or the stock market, there may be a real estate crystal ball.

It is all about the banks. Banks not only control the reigns to capital and reasonable debt, at a time like this when debt positions are the only positions left in real estate, banks control a whole lot more. In fact recent bank data suggests that institutions are in control of hundreds of billions in real estate. How they handle it will affect us deeply. In this installment we’ll look at the 180 (more or less) local lenders are dealing with in terms of real estate and what to expect next.

Massachusetts’ banks are generally fairing better than the those nationally when it comes to real estate loans. Approximately 2.2% of all the banks in the US are headquartered in MA, while our banks only hold about .44% of the real estate problems. This is a good start. The most recent consolidated bank reports available show that MA banks hold only about $1.27B in problems. A drop in the bucket compared to the $290B+ in whole loan and REO problems with lenders nationally.

It’s not all peaches and cream though. Many things are tracked, but 3 of those things fall into the distressed real estate pipeline, including 90 day late loans, nonaccrual loans, and REO. For each of these three columns we track residential, commercial, construction, and multifamily problems. In nearly all cases, and in almost every category, distressed real estate balances are growing nationally and locally.

Dollar Volume of Distressed Assets at MA Banks

Massachusetts based banks are reporting increased real estate problems.

Number of Massachusetts Banks with Distressed Assets

More Massachusetts based banks are reporting problems.

Do you notice a pattern?

Let’s ignore the first column for now because 90-Day-Lates are not as good a forecasting tool as non-accrual or non-performing loans. In nearly every category problems are mounting, not just with individual banks but across a greater number of banks.  If a crystal ball exists though, here it is in the numbers.

The hunch is on continued problems across the real estate spectrum, more struggling banks, more struggling property owners and certainly more great deals for those with capital. The next 18-24 months should prove to be very exciting for those prepared.