Which Areas Will Be Most Affected by Lending Policy Changes?

Over the weekend, the U.S. stopped guaranteeing big loans in expensive cities, and ever since the folks in real estate have been holding our breaths to see the market’s reaction. Now Redfin has released new data showing which areas are most vulnerable to the policy change.

First, some background. The reason the government began backing bigger loans in 2008 was because the banks were too jittery to fund jumbo loans on their own. Today, the banks are still jittery about jumbos, but the government is intent on letting the market take its course all the same.

In LA, San Francisco, Washington DC and New York, the government will now only guarantee loans borrowing less than $625,000, whereas on Friday the the limit was $729,750. This means that if you’re borrowing more than $625,000 in those areas today, you’ll now have to pay higher interest rates, and you may not be able to qualify for a loan at all. This could lead to fewer sales.

Projections have differed sharply. Last Monday, the head of the California Association of Realtors was apoplectic: “This is just going to kill us,” Beth L. Peerce told the LA Times’s Alejandro Lazo. But the Federal Reserve estimated that only 3.4% of the loans backed by the government last year would have been affected by the lower loan limit. The Wall Street Journal article citing this data was the most-emailed real estate news for three days straight.

So who’s right, the government or the Realtor association? It depends not just on whom you ask but where. For the areas we cover, Redfin Real Estate Scientist Tim Ellis analyzed sales activity over the last six months county by county and neighborhood by neighborhood to project which areas would be hit hardest. Let’s look first at the county data, so you can also see how loan limits changed:

As you can see, most of the U.S. won’t feel a thing at all, but a few counties will.

Where did these numbers come from? To calculate the percentage affected, we looked at closed sales where the loan would have been below the older, higher limit, but was still above the new, lower limit.

And since government-guaranteed loans require a 20% down-payment, the affected home-prices are actually higher: where you can now borrow $625,500 with a 20% down-payment, you can buy a home worth $781,850. Where the upper limit used to be a $729,750 loan, this allowed you to buy a $912,188 home.

To project how many LA or DC homes are likely to sell for more than $781,850 but less than $912,188, we looked at sales that closed between April 1 – September 30—not currently active listings—just because active listings don’t always sell for their asking price.

There is a gap in this analysis, because loans directly ensured by the FHA don’t require a 20% down-payment, thus expanding the range of homes for which demand will be affected. But we focused on conventional government-backed loans to get a simple, conservative answer.

In order to better visualize how the effect varies by location, we created zip code heat maps of each of the above-listed regions. Here’s the Bay Area, which looks like it will be hardest hit by this change. Click on any zip code to see the breakdown. Red represents 20% or more affected, Orange for 10% to <20%, Yellow for 5% to <10%, and Blue for <5%.

Here are links to the full collection of heat maps (or just zoom out and drag the above map to your area):

• Bay Area
• Washington DC
• San Diego
• Boston
• Seattle
• Los Angeles
• Queens, NY
• Sacramento
• Baltimore
• Portland

Finally, let’s break this down in list form by neighborhood and by city.

San Francisco
Within the hardest-hit county of San Francisco, we can see that the area where I used to live, the Castro and Mission Dolores, is the likely to be most affected:

• Castro: 24.2%
• Bernal Heights: 23.2%
• Mission Dolores: 19.0%
• Russian Hill: 18.6%
• Central Sunset: 18.4%
• Miraloma Park: 17.9%
• Noe Valley: 16.8%
• Potrero Hill: 15.9%
• Sunset District: 15.8%
• Marina District: 15.2%
• Twin Peaks West: 14.8%
• Richmond District: 12.0%
• Mission Bay: 11.9%
• South Beach: 11.4%
• Potrero: 11.3%
• Parkside: 10.9%
• Mission: 10.8%

San Mateo County, Northern California
Traveling south to the second hardest-hit county, San Mateo, we project that the damage will be concentrated mid-Peninsula and north:

• Belmont: 23.7%
• San Carlos: 21.1%
• Millbrae: 19.7%
• Foster City: 15.7%
• San Mateo: 10.0%
• Burlingame: 9.9%
• Redwood City: 9.0%
• Menlo Park: 8.1%
• Half Moon Bay: 6.7%

San Mateo County, Northern California
Rounding out the Bay Area in Santa Clara County, the most-affected areas are all south of downtown San Jose:

• Almaden Valley: 21.7%
• Willow Glen: 16.6%
• West San Jose: 12.8%
• Silver Creek: 11.3%

Fairfax City & County, Northern Virginia
Outside of DC, the closer you get to the Potomac River, the greater the effect:

• Wolf Trap: 20.7%
• Great Falls: 17.2%
• McLean: 15.4%
• Mantua: 14.1%
• Tysons Corner: 11.5%
• Dunn Loring: 10.3%

Arlington County, Northern Virginia
In tiny Arlington County, the most affected areas were all within Arlington, not Alexandria, so we look at the data by neighborhood:

• North Rosslyn: 18.3%
• Courthouse: 15.6%
• Rosslyn: 14.9%
• Lee Heights: 14.1%
• Radnor / Fort Myer Heights: 9.3%

Washington DC
And in Washington DC, the damage is scattered throughout town:

• American University Park / Friendship Heights / Tenleytown: 34.0%
• Southeast Chevy Chase: 30.0%
• Capitol Hill: 13.9%
• Massachusetts Avenue Heights: 13.0%
• Mount Pleasant: 12.2%
• Capitol Hill/Lincoln Park: 12.1%
• Glover Park: 11.7%
• Van Ness/Forest Hills/Wakefield: 11.4%
• Howard University/Le Droit Park: 10.2%
• Glover Park/Cathedral Heights/McLean Gardens: 10.1%
• Foxhall/Palisades/Spring Valley/Wesley Heights: 10.1%
• Stanton Park: 9.2%
• U Street Corridor: 8.5%
• Cardozo/Shaw: 7.9%
• Northwest 7.8%
• Georgetown: 7.3%

San Diego County, Southern California
In San Diego, the most-affected cities are mostly along the beach north of the city:

• Solana Beach: 27.6%
• Carlsbad: 16.9%
• Encinitas: 14.5%
• Coronado: 13.9%
• Poway: 9.3%

Orange County, Southern California
In Orange County, the damage is mostly off the coast:

• Laguna Beach: 15.1%
• Yorba Linda: 13.3%
• Ladera Ranch: 12.6%
• North Tustin & Tustin Foothills: 12.2%
• Rossmoor: 11.5%
• San Clemente: 10.1%

LA County, Southern California
In Los Angeles, the affected areas are all over the map:

• La Canada Flintridge: 17.8%
• El Segundo: 16.1%
• Sierra Madre: 14.9%
• Calabasas: 14.7%
• Westlake Village: 14.5%
• Manhattan Beach: 14.2%
• Rancho Palos Verdes: 13.3%
• Arcadia: 13.3%
• West Hollywood: 13.3%
• Rolling Hills Estates: 12.8%
• Palos Verdes Estates: 12.4%
• Redondo Beach: 12.1%
• Hermosa Beach: 12.0%
• Beverly Hills: 11.4%
• East San Gabriel: 11.1%
• La Crescenta-Montrose: 10.9%
• Santa Monica: 9.6%
• South Pasadena: 9.3%

Suffolk County, Boston Area
In Suffolk County, the hardest-hit areas are all in Boston:

• Bunker Hill/Thompson Square: 12.5%
• Charlestown: 9.8%
• City Point: 9.0%
• South End: 8.8%
• West Roxbury: 8.7%
• Downtown: 8.1%
• North End/Waterfront: 7.8%
• Central: 6.9%
• Brook Farm/Veterans of Foreign Wars Parkway: 6.8%
• Upper Washington: 6.7%
• West Broadway/D Street: 6.6%
• Jamaica Hills: 6.3%

King County, Seattle Area
And finally in King County, the areas most likely to be affected are on the Eastside:

• Sammamish: 16.4%
• Mercer Island: 11.3%
• Newcastle: 10.8%
• Redmond: 8.5%
• Bellevue: 8.2%
• Vashon: 7.9%

Within Seattle, the side of Queen Anne facing Lake Union (11.0%) will be hit hard too.

Over the next few weeks, Redfin will track whether closed sales are declining in these areas, so we’ll keep you updated on how the projections compare with reality.

Buying a Condo With an FHA Loan?

The Federal Housing Administration (FHA) has been a veritable beehive of policy change over the past month. We’ll be discussing the impact of a lot of these changes in the next few days, but we’re starting things off with the changes to the condo approval process that went into effect on February 1^st, 2010. Essentially, if you’re trying to buy a condo using an FHA loan, you’ll need to be sure the condo project is already on the FHA’s approved list, or be prepared to deal with some delays and extra legwork.

Before February 1^st, if you were hunting condos with the intention of getting an FHA loan, you had a couple of options. One was to consult the list of condo projects already approved by the FHA. If a project was on the list, it already met the FHA’s requirements, and you were pretty much good to go.

If the condo project wasn’t on the approved list, you had a second option – Spot Loan Approval. The Spot Loan process required the condominium project’s Homeowner’s Association (HOA) to complete a relatively simple two-page questionnaire designed to suss out the project’s overall health. If successful, this process would allow you to move forward with the purchase of your condo unit, without requiring the entire condo project to go through the more rigorous (and time-consuming) process of full FHA approval.

But as of February 1^st, the Spot Loan Approval process has been 86’d.

What does this mean for you, the would-be condo buyer? If you’re planning to get an FHA loan, you have even more incentive to start your search on the FHA approved condo list. Since these are condo projects that the FHA has already approved, getting financing for one of these units should be relatively straightforward, depending on your own loan-worthiness. Keep in mind, however, that projects will be required to be recertified every two years after the date of their placement on the approved list.

What if your dream condo isn’t in a project on the FHA approved list? The short answer is: the condo project must get on the FHA approved list. How does that happen? You’ll need to work with your lender to complete one of the following processes:

First, your lender can submit all the necessary paperwork to the HUD Review and Approval Process, or HRAP. There’s a lot of chatter on the net that this process will take 4-6 weeks, but the HUD’s press release states the process has been “streamlined to allow for uncomplicated condominium project approvals.” Ahem.

Alternately, your lender may be authorized to review and approve the condo project. This route, known as the Direct Endorsement Lender Review and Approval Process (DELRAP), may prove to be the speedier of your two options. It’s only available via lenders who have unconditional Direct Endorsement authority. Meaning that they have specific staff and expertise dedicated to the process of reviewing condo projects. Which is probably a good thing, when you read through a list of the requirements for condo approvals through DELRAP.

The following is a summary of that process as taken from the HUD’s press release; for the nitty-gritty, check out the full HUD press release on the subject, and skip ahead to section V: Project Eligibility Requirements.

1. Minimum Number of Units: Projects must consist of two or more units.
2. Insurance Coverage: Projects must be covered by hazard and liability insurance and, when applicable, flood and fidelity insurance.
3. Right of First Refusal: Right of first refusal is permitted unless it violates discriminatory conduct under the Fair Housing Act.
4. Commercial Space: No more than 25 percent of the property’s total floor area in a project can be used for commercial purposes. The commercial portion of the project must be free of adverse conditions to the occupants of the individual condominium units.
5. Investor Ownership: No more than 10 percent of the units may be owned by one investor.
6. Delinquent Homeowners Association Dues: No more than 15 percent of the total units can be in arrears (more than 30 days past due) of their condominium association fee payments.
7. Pre-sales: At least 50 percent of the total units must be sold prior to endorsement of a mortgage on any unit.
8. Owner-occupancy Ratios: At least 50 percent of the units of a project must be owner-occupied or sold to owners who intend to occupy the units.
9. Legal Phasing: Legal phasing is permitted for condominium processing. In other words, if a condo high-rise is half-built, the project may still be eligible for FHA approval, as long as the building meets certain requirements. Floors must be “phased  in” in groupings of no less than five floors, amenities and common areas must be complete, a temporary occupancy certificate must be secured, and a third party completion bond obtained.
10. FHA Concentration: Basically, the maximum concentration for FHA loans in any one condo project  is 30%, plus a small tolerance to accommodate for some fall-out. (Note: This percentage has actually been upped to 50% until December 31, 2010, and can even go as high as 100% under certain conditions. For more information, check out the HUD’s Temporary Guidance for Condominium Policy.)
11. Budget Review: Mortgagees must review the homeowners’ association budget (the actual budget for established projects or the projected budget for new projects) for all projects.

Simple, right?

So, pick your condo off the FHA approved list, or prepare to kill some time while the condo project goes through HRAP or DELRAP.

For purely historic value, here’s a link to the old Spot Loan Approval form (pdf, form no longer in use).

(Photo credit: Heather_Lucille on Flickr/Paramount Pictures. Special thanks to Matt Allen of Cornerstone Home Lending for his assistance with this post.

NOW IT’S PERSONAL… AND WE’RE NOT GOING TO TAKE IT!

Did anyone see today’s Wall Street Journal article by Bob Hagerty about Countrywide’s efforts to battle bad publicity? The cast of characters includes a former San Diego Chargers offensive lineman screaming “NOW IT’S PERSONAL” on a conference call with managers, an executive earning $120 million a year describing himself as a “poor kid from the Bronx,” and a former Clinton White House spokesman having this promise to Countrywide staff show up in the world’s most widely read business newspaper: “I have brought companies through the worst type of publicity.”

Every company has good days and bad, but it is hard to imagine two more different entities colliding than the sales-driven Godzilla of mortgage banking, Countrywide, and the self-effacing former head of the Journal’s London bureau, Bob Hagerty.

Our bonus link, in memory of the audacious Herbert Muschamp, is his review of the Seattle Central Public Library. The New York Times’s architecture critic died today at the age of 59. He describes the library as “a blazing chandelier to swing your dreams upon” (whereas the EMP is “like something that crawled out of the sea, rolled over and died”). You could tell that he must have known when he was writing about the building that it would be the last one he ever reviewed. I thought of his essay all the time during my pre-Redfin days of joblessness, spent mostly on the 9th floor of that library, with its view of the courthouse across the street and the leaves falling down in the middle of a crowded city.

And while we’re on the subject of libraries, a double-bonus link, to photos of the great libraries of the world, from a friend of Redfin.