12 May Ruth Krishnan, Rob DeContreras, & Eric Wood Webinar
We’ve made it to May and we’re still hanging in there and finding ways to keep pushing business forward! There have been so many changes in our lives and the industries that shape them, and I’m doing my best to help keep you all informed with the latest information that I hope you find especially useful during this unprecedented time.
My most recent webinar guests are Rob DeContreras and Eric Wood, private mortgage bankers at Wells Fargo, who rank #5 in the whole nation! I know many of you are wondering about all the developments going on as they relate to your mortgage, interest rates, refi and deferment options, etc., so I sat down with these two experts to help us all get a better understanding of what’s really going on.
Feel free to watch our recording above or read the transcript below, as we go over the questions that are on many minds. If you’d like to get in touch with Rob or Eric directly, feel free to reach them at the contact information provided here:
Private Mortgage Banker – NMLSR ID 483473
650-558-2007 (Office), 415-999-1717 (Mobile)
Private Mortgage Banker – NMLSR ID 282823
650-558-2005 (Office), 415-889-0708 (Mobile)
Transcript from our call:
Ruth Krishnan: I’m here with Eric Wood and Rob DeContreras over at Wells Fargo where they rank #5 in the whole nation! I wanted to jump on a call with them to talk about what’s going on in lending. I’m getting calls from clients asking, “Is the market going to crash because lenders are not going to be able to give loans anymore?” So why don’t we start with that question.
Eric Wood: I think we can start there. I don’t think the market’s going to crash. The banks are still lending.
Ruth Krishnan: Have they tightened up restrictions a little bit?
Rob DeContreras: They have. But we’re still here. We’re still busy. We’re still doing transactions. We’re still doing purchases, especially in San Francisco, and across the whole Bay Area, actually. We have timed a little bit, so in the jumbo arena we have to have 20% down and you want to see certain credit scores.
Ruth Krishnan: As soon as I heard someone say, “Wells is no longer doing loans,” I called you to figure out what’s going on because everybody was freaking out. When you told me, “Now we need 20% down,” I thought, didn’t we always need 20% down???? Because in San Francisco, to write a competitive offer you really need 20% down to get into a contract. I can’t even remember the last time we ratified something that wasn’t 20% down. For this market that you guys specialize in, San Francisco specifically, and the Bay Area in general, the jumbo loan business was already pretty restrictive before COVID, right?
Rob DeContreras: I don’t know if I’d call it restrictive, but as you’ve mentioned, our profile client is, for the most part, putting at least 20% down. There is a small segment of folks out there who make a lot of money but haven’t saved a ton yet, and they want to get into the market because their mortgage would be, in many cases, cheaper than their San Francisco rent. That’s a little bit of a niche that unfortunately we’re not covering right now, but for the most part, yes, our profile client is putting 20% down.
Ruth Krishnan: Got it. What are you guys seeing as far as rates right now?
Eric Wood: Really good. They’re still super attractive, 20% down with a 780 credit score. We’re well below three and a half. It depends, but we can get stuff down 3.25 with the APR, 3.28, so there’s no point to that. It’s super competitive. I think the affordability factor and rates are something that I didn’t expect to see.
Ruth Krishnan: For a while there, rates were going down, the Fed was at zero or something, and everybody was saying, “Oh my gosh, this is amazing for the real estate market,” which of course I love to hear. That’s music to my ears! But then I read this article that Rob posted on his Facebook which said the banks are not dropping their rates. Can you guys talk a little bit about why that is? Because I think there are some major misconceptions out there when people hear that the Fed is dropping rates. Rates are great, but that doesn’t necessarily mean you need to call your lender to refinance your home.
Eric Wood: People think the Federal Reserve controls interest rates, and they do. But they control it from a short-term standpoint. They do not control it long-term. Mortgages are derived based off of long-term interest rates, not short-term interest rates. The Fed has an influence on long-term interest rates, but they do not control them like they do for the Fed fund rate. So the Fed fund rate controls short-term instruments like credit cards, lines of credit, overnight bank rate, that sort of thing. There just hasn’t been education on these things to the consumer, so when consumers hear that the Federal Reserve lowered rates, they also think “well, why aren’t your mortgage rates lower?” But they don’t realize that these are two different instruments.
Ruth Krishnan: It seemed like everybody and their brother was refinancing their home from the fall, making the banks so busy that you guys weren’t really incentivized to make rates lower. Am I understanding that properly?
Rob DeContreras: There is definitely a component of that. Piggybacking off of what Eric said, in simplest terms, that Fed fund rate is consumer driven. They’re doing that so that people will go out, spend money, and build the economy back up. And you’re right, our rates have been terrific since fall and there have been many people refinancing (especially in the jumbo market). When you bump up against that capacity, the only way to control that is to either raise the rates or keep them steady.
I think that was something hard for customers to understand. Rates are already low, but they’re not going any lower right now because we just don’t have any room– and that was industry-wide.
Ruth Krishnan: So are you guys sleeping at all?! Or are you just working nonstop right now?
Eric Wood: It’s very busy.
Ruth Krishnan: Can you take on new clients?
Eric Wood: We’re taking them on!
Rob DeContreras: Especially those purchasing. Let’s keep this going!
Ruth Krishnan: My heart obviously lies with the purchase:) but does it matter to you guys whether it’s a refinance versus a purchase?
Eric Wood: Yes.
Rob DeContreras: Our business model is based on the purchase and working with folks like you. Refi is part of the business, but to be honest, it’s not even part of our business plan. We reached our business plan for refi in January. We focus on the purchase and that’s how our team is built– to support the purchase, especially the quick-close purchase, which is so important in our market.
Ruth Krishnan: You guys are really phenomenal at being able to perform quickly.
One of the things that a lot of people are talking about right now (which seems to vary a lot from bank to bank) is the idea of mortgage deferment. Because of everything that’s been going on, we’ve only been able to sell a few houses lately (one of them sight unseen, which was pretty exciting), but I’ve still been paying my team to work from home during this shelter-in-place. I realized I needed to be in a good cash position to maintain my business, and since we’re lucky enough to own a couple of investment properties, I decided to look into that and see what could be done there. I called the bank I have my mortgage through over in Tennessee, and they had an automated system set up that said, “If you want a deferral, press three,” so I pressed it and it continued to be an automated system asking more questions. It didn’t even tell me exactly what they were going to do, but they said they can defer the loan and will either move me into a 40 year loan or raise the interest rates. After telling me that, the automated system asked, “Do I wish to continue? Press one for yes.” And I thought to myself, “What am I agreeing to here????” So, I didn’t go through with that. The experience raised a huge red flag for me and made me wonder what people are getting themselves into with these deferments. Can you guys talk a little bit about that?
Rob DeContreras: I think a lot of folks are looking at this as a “free lunch.” Obviously, there are people out there who definitely need the help– whether the relief is temporary or a little longer-term– but what a lot of people don’t understand is that we defer for 90 days and then you owe it. At least that’s the case with Wells Fargo, I can’t speak to how other lenders are handling it because everyone’s doing it a little bit differently.
So that’s one of the biggest misconceptions. That doesn’t mean you can’t make a plan for extending it, adding it onto the back, spreading it over the remaining term of your loan, etc. There are so many different options, but we cannot guarantee that none of those options are going to affect your credit or how long it’s going to take to put that plan into place– especially here in our market where there are hundreds of thousands (or millions) of people trying to do this with us, since we’re one of the top servicers in the country. So my advice is: if you don’t need it, don’t do it.
Ruth Krishnan: When you say affect your credit, are you saying these banks are not even telling you that? It sounds like one option is where you eventually have a big upfront payment, which could be a little bit scary if the person wasn’t anticipating it. In this case, would your credit be hit in the same way that it would be if you didn’t pay your mortgage?
Eric Wood: There’s nothing that’s going to happen during the first three months– there are no late fees, etc. It’s at the end of the three months that you have to ask yourself “what’s going to happen.” All of this happened so fast that I don’t know if anyone has a definitive plan on what’s happening. I think people are taking this time to figure that part of it out, because we’ve heard a couple of different things (even internally) about what they’re going to do. I don’t think the process has been completely spelled out and even clients that have tried to do it ended up opting not to do it (as you did) after they reviewed the paperwork. And the process is actually really easy for clients– they go on their bank’s website and there’s a button to click. They created this very quickly in response to the regulations– they didn’t have a week or more to prepare.
Ruth Krishnan: It was just suddenly the law, right? This process became a new thing that you now have to provide. Correct?
Eric Wood: It happened so fast, but again, if you need this, you should call. It takes a while to get through but if you call, we will walk you through the process. It’s not just an automated service on the other line– there are live people answering and talking you through the options.
Ruth Krishnan: What’s going on in the world of appraisals? Are you guys doing desktop appraisals? Are you guys going in? How long is it taking? Are things closing on time right now?
Rob DeContreras: Yes, we’re closing on time and we’re doing transactions. When shelter-in-place first went into effect, there was definitely a period of shutdown where the lenders were trying to figure out what to do. Wells Fargo took a little bit longer than we all would have liked because they were hoping for a bit of a more systematic approach to how we were going to move forward. To answer your question, yes we are doing exterior appraisals and drive-bys.
There’s so many pictures and videos of everything online because of marketing like yours, and we see that. In some refi cases, we’re still doing exteriors, but we’ll ask the client to take some pictures. We’re trying to be as flexible as we can there. When it first went into place about a month ago, there was definitely a backlog– but we’re in pretty good shape now. It’s still a tiny bit of hit or miss, but we’re also not doing 15 or 17 day close of escrows right now. We’re trying to push closings to at least a minimum of 21. In most cases, folks are open to 25 or 30 days and it hasn’t been an issue.
Ruth Krishnan: I probably spend about 20% of my day right now calling up other real estate agents, finding out what’s going on with either the deals they’ve been involved in or properties they have on the market, and figuring out how people are writing offers because if we’re going to be submitting something for a client, we want to know what’s competitive, how many offers are coming in, and what’s the standard. The same thing goes for our listings. We want to know if this is a good time to buy or sell. Since you guys are seeing so many more contracts than me, can you share some of what you guys are seeing? In the San Francisco area, are you still seeing a lot of non-contingent offers? What are you guys seeing as far as a mix?
Eric Wood: It’s been all over the place. We’re seeing less multiple offers than I’ve seen since 2012. What is kind of nice is that it’s giving people time to actually have a conversation versus, “Are you going to give me an offer or not?” But even with this, it’s still really competitive.
Eric Wood: Prior to this meeting I had a call with a listing agent in Oakland and she’s selling homes faster now than she did before, especially if it was vacant. What we’re seeing is that there is still demand in this market.
Ruth Krishnan: We submitted an offer about 12 days ago. I made these kinds of calls to other agents beforehand and found out that out of the 20-30 offers I was hearing about, there were only a few that didn’t have finance contingencies– very very few. So I actually felt comfortable having a finance contingency for this particular buyer. It was a sight unseen property. I had never been involved in something like that before. My buyers had a 3D tour and were told that within 24 hours they could come in and see the property– but only if their offer was accepted. We kept our financing contingency, but the listing agent told me she had two other offers that didn’t have any other contingencies in place, other than the walkthrough.
My client happened to work at a company that had a blackout period on their stock, and I’m sure a lot of other bigger companies have that right now too. My client wasn’t able to liquidate everything but he ended up doing it because that’s what he needed to do in order to win this deal. I’m curious as to what you guys are seeing in this space.
A lot of the people who I’m calling are in Oakland, Marin, and even Napa; and all of these Bay Area markets seem to be holding fairly strong. I think we are experiencing less multiple offer situations because we don’t have as many showings since there are such strict regulations in place, so the people who are actually coming to tour are very serious buyers. On one of the listings we have, we’ve only shown it to maybe four people, and two or three of them are talking about writing an offer. So it’s been interesting to see that the people you’re getting in the door are definitely much more ready to go.
Rob DeContreras: I’m interested in your opinion on this, Ruth. We’re starting to see people pricing their properties where they realistically think it should sell. It’s like, “Here’s my price, I’m ready to sell. Let’s just do it.” We’re seeing a lot more transparency in the list price. Are you seeing that?
Ruth Krishnan: Well, that’s what we have done and yes, I think that’s a wise move. We’ve had a few people who priced it just below, and those seem to be the ones that have quickly sold, (especially if it’s a single family home that’s priced around $1.5). Those have sold within 24 or 48 hours with four offers, and sold for about $1.650. I feel that it’s dangerous to price really low right now because I just don’t know that you’re going to be able to catch back up to the price that you might want. So right now we’re pricing at value and we’re willing to wait for the right offer. I talked to some agents in other markets and asked them, “Gosh guys, what do we do after the 30 day mark!?” And they remind me how spoiled we are in this market. 60 days on the market might be normal everywhere else, but for us in San Francisco, if it passes the 14 day mark, we think something is really wrong. I think we might just have to get ready for a bit of a new reality when it comes to selling homes because like we always tell clients, the more people we get into the home, the more offers we’re going to get. And the more offers we’re going to get, the higher the price is going to go– and so we’d price it really low with that logic. But it’s a whole new world now and we’re trying to figure out how to completely shift our approach. We have to think differently about how to market properties virtually and how to appeal to those buyers to make sure we’re keeping stuff in front of them while also keeping our sellers realistic because a lot of these sellers are calling me after 2 days asking, “Are we setting a date?!” So the pressure is still coming down from that side and I’m like, “Didn’t we talk about this? We talked about it taking a little bit longer.” It’s definitely stressful, but that’s why we get paid the big bucks.
Eric Wood: We ask the clients that we’re talking to about getting pre-approved whether they’re in a hurry and what their time frame is. Their response is often, “Oh, I’m not in any hurry!” but then the next day they’re asking, “Can I get a preapproval letter?” So they’re telling us the same thing that goes to what you’re saying. Buyers are out there and the demand is still there. You just have to find them.
Ruth Krishnan: Now more than ever, some people are calling us saying, “Hey, I’ve been stuck in my house for what feels like 500 days with my two kids that are driving me crazy and this house is tooooo small. It’s always been too small and now I know for sure I really need a new house.” Some of these people are more motivated than ever to get the heck of there and into a new house. Given that we have such restrictions on properties and inventory– even during a good time, let alone now– it seems like it’s one third of what it normally is. I have faith that the market will continue to be quite strong.
Let’s switch gears a little bit. Let’s get into “buying 101,” if any of those people are still listening to us. One of the things I like to talk about with my buyers in a first meeting is the mortgage, especially when somebody says to me, “I want to spend $1.5 million and I want to buy a three bedroom, two bathroom house in Noe Valley.” And I tell them, “Welllll, that’s going to be a little bit difficult.”
Rob DeContreras: That’s not going to happen:)
Ruth Krishnan: So then we talk to them about a few different things, one of which is the mortgage and how we can stretch that mortgage. Because what I really hear them saying is, “I want to spend $5,000 a month on my mortgage.” It’s not the $1.5 million, it’s really just the monthly amount .
Eric Wood: It’s funny you bring that up because when we’re doing an initial conversation, that’s one of the first questions we also ask. We ask them how much they want to spend. And then we come back into the number because you’ll ask them, “What purchase price do you want to focus on?” And oftentimes their answer to that is, “I don’t know.” So we work backwards and that’s exactly one of the questions that we focus on.
Depending on their profile, there are a few options we can go with. There are ARM loans, which we’re doing more of now than we’ve done in the past. Then you have your traditional 30 year fixed rates. The ARM loan gives you more affordability because it’s anywhere between three eights and half a percent lower than the 30 year and the qualifications pretty much have the same guidelines.
Ruth Krishnan: The thing is, if it’s a $1.5 million house in San Francisco, it is not going to be their forever house. They’re stretching to get in it and it’s not going to be their dream house. They’re going to make it work and they’re not going to be excited to get out of there whenever they’re ready to move on to their next bigger house, which is probably going to be in five years (or maybe not now with rates the way they are). When we bought our first house in 2005 I was not in real estate and did not know what I was doing. I didn’t have the best advice and we ended up getting a 30 year loan with an interest rate of about 6%, so of course we refinanced it three or four times over the next four years.
Eric Wood: You got your own adjustable.
Ruth Krishnan: It was so stupid to be paying those rates. One day, maybe five years into the loan, I looked at it and thought, “Dude, we paid like $5,000 down on our principal. What is going on?” I was in real estate by that point so I called a lender and asked them to explain to me how this happened.
A lot of times people think they’re doing the safe thing by getting the 30 year loan, but not really understanding what can happen with that. I really wish that the industry as a whole (I know you guys probably are, and I’m trying to do my part here too) would better explain loans to people up front, so that they don’t end up spending money they don’t need to spend.
Rob DeContreras: It’s really about working with someone that’s going to take the time to educate you. It’s so easy to say, “Here’s your 30 year fixed.” Oftentimes, we still hear people say things like, “Well, that’s what my parents think I should get.” But your parents aren’t going to be the ones making your mortgage payment. What’s important is working with someone who’s going to take the time to educate you because as you said, it’s probably not their dream house.
You have a few different buckets there– you have folks that are in finance who understand the markets and understand the cycles, and those are the folks that are taking a 7 to 10 year ARM every time.
Then you have the first time home buyers whose purchase won’t be their last. It’s not their dream house, so why are they paying half a percent or maybe five eights (depending on whether it’s a 30 year or a seven year)? That’s tens of thousands of dollars in affordability that might be between $300 to $500 a month, and is that going to be able to stretch them to that $1.6 or $1.7 million house instead of that $1.5 million house? As you know, that can make a huge difference from neighborhood to neighborhood.
Eric Wood: The other thing we try to explain to people is that if you’ve gotten a 7.1 ARM and it goes fully adjustable after year eight, your breakeven point is about 10.5 years compared to a 30 year. So the national average that someone holds a loan is about seven years. In the Bay Area, it’s actually less. When it comes to the seven year, people might think, “I would never take an adjustable,” but when you really start getting into the mechanics of it and someone explains it and educates them, they go, “Ohhhh, okay.”
Ruth Krishnan: I will say that my most financially savvy clients are almost always in an adjustable rate mortgage, unless they’re paying cash.
Rob DeContreras: There’s also protections that we put in place. This is not year 2000 where there are balloon payments and that type of thing. There are yearly payment caps and a lifetime payment cap. As a lender in fair lending, we can’t put someone into a product that we don’t think they’re going to be able to afford if it does adjust to the worst case scenario. Again, it goes back to education and taking the time to be educated on this and feeling comfortable with your decision.
Ruth Krishnan: Last question. If you guys had a crystal ball (because as industry leaders, we all get asked these questions), what do you guys believe is going to happen with rates over the next 12 months?
Eric Wood: A lot of it’s going to have to do with the virus, going back to work, and unemployment numbers. It’s going to be a lot of macro economics and looking at what the Fed is going to do in terms of buying mortgage backed securities. There’s a lot more to it, but the simple answer is, I don’t think we’re going to see much variation in rates.
Ruth Krishnan: I know the banks can’t handle much more. I’m sure your team isn’t being bogged down with all the PPP and SBA loans, but is it bogging down your capability working for Wells?
Eric Wood: Not from a purchase standpoint.
Ruth Krishnan: Got it and that’s one of the things that’s hard to know as a consumer, because we keep hearing all this stuff about lenders being too busy.
Rob DeContreras: It’s hard to separate it when you work for such a large organization.
Ruth Krishnan: Are there any other amazing pieces of wisdom that I forgot to lead you into or ask you about?
Eric Wood: I would add that there is a bright side to all of this working from home. It has put a spotlight on the areas where the industry needs to focus and where they’ve kind of let things go. There’s a lot of stuff we have to work on (mobile notaries, virtual signings, counties allowing for electronic recordings, etc.) and this sheltering in place has really brought stuff to the forefront. I think it’s going to ultimately make us more efficient and better, and those are some positive things that might come out of all this.
Ruth Krishnan: I agree.
Eric Wood: They’ve been talking about some of this stuff for years in the real estate industry. And it’s finally made people realize that now we’ve got to get it done because we’re being forced to implement it.
Ruth Krishnan: My husband is a tech guy and when he and I tried to do a refi a few years ago, he said to me, “We don’t need a notary. We can do everything virtually.” And I told him, “No, the banks aren’t going to let that happen.” But he said he Googled it and that we could, so we went ahead and tried to notarize our loan docs electronically, but of course the bank didn’t let us and told us that they had to have it sent to us. It seemed so stupid that we weren’t able to do it because the idea was there and it seemed like everything was in place for it to work just fine. Do you think we’ll start being able to do stuff like that now? Are you guys doing stuff like that now?
Eric Wood: Not yet.
Rob DeContreras: They’re starting pilots on the east coast. That’s where it was needed most, so they were putting those energies over there. They were doing things like virtual closings where everyone was on the call (including the notary) and you can see the ID. We’re being forced to put these things into place now, which is a great thing because now that we know the capabilities, there’s no reason not to make it a permanent thing.
Ruth Krishnan: I agree. I now have clients sending me video chat links instead of calling, and it actually feels like a better connection. I’m enjoying that. I also think our kids are going to come out of this as super tech-savvy kids, light years ahead of where they would have been otherwise, so there’s definitely some silver lining in there.
Rob DeContreras: Absolutely.
Ruth Krishnan: Thank you both so much. This was really valuable and I learned a ton. This is our very first live Zoom call on Facebook, so there’s some more tech that we’re learning.
Rob and Eric are super fast. I’m sure they don’t love me saying this, but I have emailed them at 11:00 on a Sunday to get someone pre-approved, pre-underwritten in just a couple of days. Sometimes we get that call from a buyer we haven’t seen or heard from in forever, and they saw a property that day and offers are due three days later, and what do you do in order to be competitive? You need to work with somebody who can move with lightning speed to get things done. So I thank you guys for always taking such good care of those clients for me. I really appreciate it.
Rob DeContreras: Thank you and thank you for having us.
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