The biggest news for Californians in May was the defeat of Governor Schwarzenegger’s plan to borrow money and raise taxes to overcome the $21.3 billion state budget deficit. Voters said loud and clear that they preferred the state trim fat from its operations.

Among the many reasons for the budget shortfall are the negative impacts of the current recession, including an unemployment rate of 11.2% in March and a precipitous 54%+ drop in median home prices in the last two years, according to the California Budget Project.

Affordable housing seems to be one of the few economic areas in California that is growing. Home ownership in California has reached unprecedented near-term affordability, and homes that were once out of reach are not only affordable, but irresistible, thanks to government incentives. In many markets home prices and values have rolled back to pre-boom 2003 levels.

But it is still a tale of two markets. Entry-level to median-priced homes are selling much faster due to affordability and wide availability of affordable loan products. Luxury homes are slow, largely due to lender hesitation to provide jumbo loans that aren’t government-insured or sellable to the secondary market dominated by Fannie Mae and Freddie Mac.

While interest rates are at 50-year lows, the spread on conforming rates vs. jumbo rates is significant. This has caused many REALTORS® to complain that luxury buyers with very high credit scores are being treated as higher risks than conforming loan buyers with lower credit scores and less money for a down payment, says Lawrence Yun, chief economist for the National Association of REALTORS®.

According to HomeServices Lending (www.hslca.com), jumbo loans are available up to $1.5MM with an 80% Loan To Value (LTV). These loans are reserved for well-qualified borrowers who carry profiles of 740+ FICO scores and have very strong post-closing reserves. HSL’s correspondent lenders still offer loans up to $5MM at 70% LTV (75% under certain parameters) and allow for a private 2nd TD up to 80%.

Conforming loans are widely available for qualified buyers through banks facilitating government-insured Federal Housing Administration and Veterans Administration loans. Loans intended for sale by banks to Fannie Mae and Freddie Mac have a few more strings attached, including stricter appraisal guidelines designed to protect the secondary market from acquiring any more loans that could be at risk of default for portfolios or securities.

New purchases in the entry-level to median-price segment and a strong refinance business are significantly impacting the volume of loans being handled by a limited number of loan originators and underwriters. Lenders are now suggesting that borrowers lock in their terms for 45 rather than 30 days, to ensure that their loans will be processed in time.

Also causing delays are new Fannie Mae guidelines, which could slow down sales in the conforming loan range under $730,000.

Fannie Mae and Freddie Mac are managed by the Federal Housing Finance Agency, which is mandated to protect the secondary market from new home loans at risk of default. To that end, the FHFA has created two new guidelines:

– The new Fannie Mae 1004MC-71 appraisal

form (MCF), effective April 1, 2009

– The Home Valuation Code of Conduct,

effective May 1, 2009

In the short term, the net effect of these two initiatives falls on the appraisal stage of the process. They institute stricter requirements for appraisers, including guidelines on gathering comparables and new procedures aimed at preventing undue influence by appraisers. Lenders can no longer select an individual appraiser; appraisals are submitted to a panel and assigned randomly.

According to Michael Reeza, president of HomeServices Lending California (www.hslca.com), HSL has been following these best practices for the past 18 months in an effort to get ahead of the new guidelines. "Our relationships with our home mortgage consultants and appraisal panels are already in place and fully operational."

Long term, home buyers whose loans are approved can feel much more confident in their investment, even if getting there takes a little longer.

Recession end in sight?

In mid-May, the Federal Reserve was cautious about predicting economic recovery in 2009, probably to keep people from bringing out the bubbly again. Ongoing jobless claims are at record highs, but new claims are down, suggesting the worst could be over soon.

Private research firm The Conference Board, seeing across-the-board strength in its 10-component index for the first time in 18 months, said the intensity of the recession is lessening, and there could be growth in the second half of the year.

Also positive was the UCLA Anderson Forecast, released mid-May. It predicted the official end month for the national recession will likely fall early in the second half of 2009.

California unemployment may continue to rise short-term, but residential real estate is poised to recover in 2009. In San Diego County, a harbinger for the rest of Southern California, home and foreclosure inventories are declining.

"As long as homeowner distress does not rebound and recent federal government programs designed to avert foreclosure have some success, a more conventional recovery in the residential sector should be underway this year," said Mark Schniepp, author of the San Diego forecast report.