Ask the Expert: Timing the Bounce, Negotiating an REO, Fannie, Freddie & Ginnie: Who Are They?

Q. Is now the right time to buy a condo/ townhome or will we have additional price declines with more foreclosures surfacing in the next few months? I’m ready to buy, but worried prices may drop again.

A. This question has been raised often in the last 12 months, and even into 2009. I’ve blogged about “timing the bounce”, the attempt to buy right at the bottom of the market, on several occasions in the last few years. ( See for Timing the Bounce) Unfortunately, none of us can accurately answer as to where the market will go. There is definitely a buildup of REO inventory sitting with the lenders, but don’t look for a big instant “dump”…they will release it a little at a time, so as not to flood the market, and to help their inventory to retain value.

Already, many markets in the Westside of Los Angeles are showing 3-6 month runs of decreased inventory, increased demand, higher prices, and multiple offers. Sales of previously owned homes surged 7 percent in December, the National Association of Realtors reports. Existing-home sales have increased five of the last six months and have now hit a seven-month high. Distressed homes accounted for 36 percent of the sales volume in December, up from 33 percent in November.

Interest rates have more to do with keeping payments in line than price. No one was complaining when rates were 6.5%. not long ago, but a 30 year fixed rate mortgage was 4.875% on Friday at close of business. Because of mortgage rates alone, the average home buyer in our market can afford a home priced $150,000 to $200,000 higher, and still have virtually the same payment!

Because of mortgage rates, first time home buyers can look up to $600,000 instead of $450,000, and that certainly opens up more possibilities. A move up buyer can look up to $1,700,000 instead of $1,500,000. The difference could be getting a house instead of a townhome, that slightly better neighborhood or school district, those granite counter tops and family room that you always wanted, or getting the home with the 2 car garage and pool now instead of waiting until your next move.

When did the ball bounce? It bounces when it hits bottom and starts back up. Can one ever time the bounce to see the exact bottom? Unfortunately, no. So then what is the buyer’s strategy for building wealth in a turbulent market? The old saying of “buy low, sell high” is a tried and true method of creating wealth. The expression is not, “buy bottom, sell top” for a reason- it’s not possible to time the bounce.

My advice: Read all you can and study up on your local market. Shop interest rate before price. Interest rates will go up. Lock now and buy.

Q. I’m confused about the various loan programs out there. What is the difference between Fannie, Freddie, and Ginnie?

A. President Franklin Roosevelt’s New Deal established the Federal National Mortgage Association (Fannie Mae) in 1938 as a federal agency in the wake of the Great Depression. Its purpose was to bring liquidity, stability and affordability to the U.S. housing and mortgage markets. Congress converted Fannie in 1968 to a publicly held corporation to help balance the federal budget.

To compete against Fannie Mae’s domination of the secondary market and further lower housing costs, Congress chartered the Federal Home Loan Mortgage Corporation (Freddie Mac) as a public corporation in 1970.

Freddie and Fannie have similar Congressional mandates, charters and regulatory structures. Both entities buy mortgages from lenders and package them into mortgage-backed securities that are sold to investors with a guarantee against default. This creates a secondary market, allowing mortgage lenders to use the freed-up funds to make more home loans.

The Government National Mortgage Association (Ginnie Mae) was established by Congress in 1968. Unlike its GSE siblings, Ginnie does not purchase loans, but guarantees investors the timely payment of principal and interest on mortgage-backed securities containing federally insured loans — mainly FHA and VA loans.

In September 2008, the U.S. government rescued Fannie Mae and Freddie Mac from the brink of economic failure and placed them into conservatorship with the Federal Housing Finance Agency (FHFA). Some members of Congress have called for the gradual elimination of Fannie and Freddie to leave mortgage finance completely in the private sector. A Treasury Department report on the future of Fannie and Freddie will be delivered to Congress in the first half of February 2011.

Q. Is the price on a short sale or REO negotiable? By how much?

A. There are, of course, a lot of “it depends” in the answer, because every lender, situation, property, neighborhood, etc. is different. In general, REO and short sale properties seem to be the leading edge on bargain properties right now. If I were in your position, I would do the following:

1. Ask if an appraisal or BPO (Broker Price Opinion) has been done on behalf of the bank. If so, what was the date it was done? Banks will generally stick with the appraised value for 90 days, after which time a new offer can request a new appraisal.
2. Ask if the bank has an approved price for the property. The list price may have been set by the agent without consulting with the bank, so there may be a built-in cushion.
3. How long has the property been on the market? How many showings? How many offers? Banks want their properties to be “seasoned” a bit before negotiating too far from their approved price.
4. Get a market analysis from your agent to help you understand the valuation, and to use as ammunition when writing your offer.

My ultimate advice? Find out what the property is worth TO YOU, make that offer, and if the bank refuses it, at least you know you tried your best. That way, when the next property comes along, you won’t be pining for the one that got away. Negotiate!

Deborah Bremner
The Bremner Group at Coldwell Banker
REALTOR, 00588885,
(O) 310-571-1364 DIRECT
(D) (310) 800-2954

Get your Instant Home Value…