Agents fight back on tough lending conditions
Market reverts to traditional loan products, requirements
By Glenn Roberts Jr., Friday, April 25, 2008.Bookmarking Sites
Sliding home prices have made homes more affordable in some areas, though tighter lender requirements and bigger down payments have locked some buyers out of the market.
Real estate agents and brokers say they have seen some unconventional loan types, such as those higher-risk loans that have been blamed for bringing down the subprime and credit markets, largely vanish from the market while government loan products are becoming more prominent.
Stricter lending is definitely taking its toll on the market, prompting the National Association of Realtors' president to lash out this week at the current state of private lending practices.
"It appears there is some overreaction on the part of some lenders now in requiring higher down-payment percentages than may be necessary," said Richard F. Gaylord, the group's 2008 president and a RE/MAX broker in Long Beach, Calif., in a statement this week.
Gaylord said there is some relief for buyers in the form of "more lenient policies" for FHA loans, which are mortgage loans insured by the U.S. Federal Housing Administration that are intended to serve those who cannot afford a conventional down payment or qualify for private mortgage insurance.
Mike Motta, a broker in Assonet, Mass., south of Boston, said, that tighter lending requirements have killed some real estate deals.
"There was a period of time a few months ago when the mortgage qualifications rules seemed to be changing daily," Motta said. "That seems to have settled out, and things are much calmer in that regard."
It is "a little trickier for many buyers, particularly those with little or no down payment or with credit problems," he said.
More buyers are looking to FHA loans these days, he said, though conventional fixed-rate mortgages are still popular and "few people I've talked with are considering anything with a variable rate."
With more limited mortgage options for some buyers, Motta said it's "more important than ever that an agent team up with one or two mortgage providers that can be relied on" to serve their clients.
In Indianapolis, FHA and Veterans Affairs loans (VA loans), which are loans guaranteed by the U.S. Department of Veterans Affairs, have returned as popular loan products, said Pat Haddad, a broker-associate who leads an agent team for Keller Williams Realty, Indianapolis.
"The days of 100 percent financing are basically gone. Underwriters are being very cautious. Subprime lending is not as lenient as it once was. Credit scores must be a little higher. Debt-to-income ratios have changed, also," she said.
Haddad said she refers all of her clients to a lender who she believes is "honest" and "knowledgeable."
"I cringe if someone tells me they are working with a lender they chose out of the Yellow Pages. It is important to have someone trustworthy to handle this very important part of the transaction," she said, adding that agents are perhaps "more protective" these days in advising clients to work with reputable and recommended lenders.
FHA loans are assisting entry-level buyers in the Orlando market, said Paula Bean, an Orlando Realtor. "For first-time home buyers, (loans) are not really a problem." A former mortgage licensee, Bean said the mortgage landscape has changed dramatically, with various loan programs entering or leaving the market.
In Corvallis, Ore., Mark Fullwiler of Coldwell Banker Valley Brokers said that qualified buyers who have a job, credit scores above 680, a good credit history and who plan to live in the home they are purchasing can get 30-year fixed-rate financing at interest rates under 6 percent.
"I personally will dissuade buyers who are not strong financially from buying a home. The only buyers I've had in this past quarter who were denied financing were college students who had a down payment but no job. They shouldn't have obtained it, even if offered," he said.
And farther north, in Fairbanks, Alaska, Jesse Clifton of ERA Northern Lights Realty said buyers with credit scores above 640 are able to secure loans, and financing is available through Fannie Mae and Freddie Mac, the Alaska Housing Finance Corp., and VA.
With the exception of the VA loan program, buyers do need to bring at least 3 percent of their own funds to the closing table or it won't work, he said.
"Many alternate financing programs ... have disappeared entirely. Without a doubt this has pushed many buyers out of the market."
Some sellers are pitching in toward the closing costs or down payment amount, "but it's still a pretty small segment of the market that is engaging in offering … concessions," he said.
"I haven't personally seen that many transactions die because of lenders failing or due to underwriter denial of the package. I've always taken pains to ensure that the buyers ... were already fully vetted with their lender so as to avoid any surprises.
"Those agents who don't take that initial step and rely on a pre-qualification letter a lender wrote, based on verbal information from the borrower, are probably seeing a much higher failure rate," he said.
In Lafayette, Calif., a community in the San Francisco Bay Area, Pete Sabine of J. Rockcliff Realtors, said earlier this year there had been confusion among consumers and real estate professionals about federal changes to the conforming loan limits.
Congress and the Bush administration have since approved a temporary increase in the conforming loan limit, which will reach as high as $729,750 in high-cost areas. The temporary increase expires at the end of the year.
Sabine said that a big challenge in high-cost real estate markets like the San Francisco Bay Area is "increasingly tightening loan underwriting and property appraisal standards."
He added, "I am skeptical that Wall Street is ready to come back into the jumbo (non-conventional) loan market until the subprime fallout and multibillion-dollar banking and investment firm loss write-downs have subsided."
The return to more traditional lending standards has "eliminated at least half of the potential buyers in the market," Sabine said, which has slashed demand and sales.
Buyers with documented income, assets and job stability and FICO credit scores above 680 can still purchase properties, these days, he said, and the higher loan limits should allow more first-time buyers to use FHA financing to buy properties "at the bottom run of the real estate food chain."
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Submitted by Phillip Jones on April 25, 2008 - 6:39am.
I think that the public needs to be made aware that owning a home is not an entitlement. They need to realize that it is a large financial commitment that requires solid credit, income and a modest down-payment.
I find my agents acting as educators with many of their prospects to make sure that everyone does not waste their time. Lenders should do more of the educating, but it seems easier for them to just put the dream of home ownership on the table and hope that the realtor(s) and seller(s) put together a deal that works for the lender. After all the mortgage broker does not have to spend nights and weekends showing the prospect homes, writing contracts and the like - they get to process the deal from their office after the agent and buyer have put in a lot of time.
Good times!
Submitted by Paula Bean on April 25, 2008 - 7:33am.
Great article Glenn -
It's interesting to see how the real estate and mortgage market are in different area's.
Although the sub-prime mortgages were a problem, so was the depreciation of housing. I think it is time for everyone to get more educated about real estate and mortgages prior to buying.
Many of the consumers I talk with want to spend more than they should, and just because you CAN, doesn't mean you SHOULD. The reason Warren Buffet is so rich right now is that he does not live above his means. Still drives an old car, and lives in the old house he has owned for years.
Who knows what the economy will be in the future, or if you lose your job, and I just saw this morning that gas prices are so high, the pumps won't even show pricing over $3.99 in some area's and they have to be replaced or repaired, or switched to charging by the HALF gallon.
The market is like a rollercoaster now, everyone should tighten their seat belts and hold on because what goes up, will come down and vice versa.
Paula Bean, REALTOR
Carib Gulf Realty Group
Regional Manager of Florida Division
e-PRO Certified Technology Expert
Accredited Consultant in Real Estate
http://www.HomeOrlando.com
Submitted by Sean OToole on April 25, 2008 - 8:19am.
The return to traditional lending practices including down payments, 30 year fixed terms, qualified borrowers and reasonable debt-to-income ratios is the best things that could happen to our industry. Our association should be (and for years should have been) calling for this as it is in the best interest of the consumer and will help avoid the instability we have seen in recent years.
Easy lending is like crack... might feel good to get a quick high, but the downside is too great. And contrary to popular opinion that this is a "subprime" problem, it reached into every demographic, we just have yet to see the full fallout from the prime and alt-a varieties. Time to wean ourselves off this particular drug rather than hoping for the crack dealers on Wall St to bring it back.
Submitted by Arlyn Mendoza on April 25, 2008 - 9:30am.
I think that this return to traditional lending feels a little like a hangover after the all night party for some people. I had always tried to steer my clients away from the negative am loans and all the other crazy programs that were on the market.
My experience was that some buyers couldn't be dissuaded. They had to have it! I lost many deals to unscrupulous mortgage brokers and realtors who persistently drove the buyers to these products. I could not in good conscience play that game.
It is a hollow feeling of vindication knowing that one was right, while the house is burning down around you! However, those of us that have been in the business for longer than 5 yrs recognize the cyclical nature of the business and we know that business will still get done, buyers will still buy and seller's will still sell.
I am all for going back to the traditional lending and Hurray for FHA!!! The hybrid programs will come back slowly and in a more conservative fashion and I plan to be around to see this market right itself again!
Arlyn Mendoza
HomeServices Lending
miami, Fl
www.arlynmendoza.com
Submitted by Kaye Thomas on April 25, 2008 - 10:14am.
I agree that returning to stricter underwriting guidelines is a good thing. However lenders need to be smarter then they were the last time. That means there should be a choice of product but with stronger guidelines for all products. Throwing the baby out with the bathwater is silly.
As an example... Alt-A loans were not designed to be used by everyone.. however they are a must for those that don't fit the cookie cutter employment test. No reason they can't be a good tool if you make them available to those with good credit and verify assets even if you use stated income rather then income averaging.
Lenders got in trouble by making these loans available to anyone who could fog a mirror. The same is true with loans with 10% down. Again not necessarily a bad loan with proper guidelines.
However no money down loans should be a permanent no-no. If you can't come up with 10% down then you have no business buying a home.. it doesn't matter what the price range. If you want people to value their home then they must do something tangible to acquire the property. Saving for a downpayment is a good start.
Submitted by chis eliopoulos on April 25, 2008 - 12:09pm.
I think that lenders are doing the right thing.
Most real estate agents are inexperienced or spoiled by the "good times" that brought us to today's situation.
I'm against any additional regulation as I'm against any act deriving from greed.
All these "buyers" and brokers have to understand that buying a house is NOT the way to get rich quick on some one else's dime.
Buying a house is the biggest purchase that most people will make in a life time.
As such, people with one gram of common sense, have to educate them selves in the proses and use the services of a lawyer, to read and explain to them the contracts involved and the legal ramifications for them.
As of today must of the current homeowners that are in trouble, are screaming that have/had no idea that their "loan" was and adjustable mortgage and that they were taken for a rite by the real estate broker, or the mortgage broker, or any one else involved except of course them selves. (I'm not saying here that the professionals involved were exactly saints either).
I think that banks keep up their strict lending requirements, and if that keeps "buyers out of the market so be it.At least the ones that are in will be educated in the process.
This practice along (with out any more regulation), if continues through the "good times" also, will minimize the possibilities of repeating the 90s and todays market condition.
Submitted by Joe Dahleen on April 25, 2008 - 12:51pm.
Here is more recent news that realtors should know about:
Fannie Mae required Home Counseling on any down payment of 3% or less.
Freddie Mac just changed its guidelines requiring Home Counseling 5% or less.
Just because it is back to more traditional guidelines – that doesn’t mean it hard to get an approval.
You can still get approve in less than 10 minutes.
Only lender telling you any different – then find someone else to us.
You can save a lot of time and money by working with a paperless lender/broker. Who wants to deal with Paper anyway.
Thankfully the process is much easier.
Submitted by Liberty Newsprint on April 25, 2008 - 4:16pm.
A Solution to stop the bleeding in the Housing Industry:
For those who bought home in the past 5 years or have an adjustable loan that will reset sometime in the next 5 years.
In order to stop the precipitous decline in the housing industry government needs to provide subsidized "Short" loans for the difference between what a homeowner can sell there house for and the amount the homeowner actually owes at rates the homeowner could receive on a regular home equity loan.
This will allow homeowners to reevaluate their financial positions to more fiscally sound situations if necessary. As it stands now homeowners with good credit have no other choice than to wait until home values increase before they can have the freedom to seek other housing accommodations.
How would this work:
Homeowner A house's current value is $200,000 he owes $250,000.
His payments are about to reset from 4.8% to 7.0%
That’s a payment of $1467 to $1664 and he can't afford it.
Homeowner A sells the house for $200K
Now He Has Options:
Option A:
He gets a loan from the government for $70K at 7% that’s $465 a month.
He finds a smaller place for sale at $150,000 puts 20% down from the government loan.
He gets a mortgage for $130,000 at 6.5% and pays $839 a month.
Now Homeowner A is paying $1,304 a month on a mortgage the will not reset. That’s a saving of $163 a month in the mortgage payments.
Option B:
Continue to pay off the government loan of $50K and find a place to rent.
That’s $333 a month plus rent he can afford to rent an apartment for $1,134
The Benefits of Government Subsidized “Short” loan?
This will allow homeowners to pay back the shortfall without damaging their credit.
Also, by stabilizing hundreds of thousands of homeowners the economy will benefit.
As it stands now homeowners have few viable options that only will exasperate the decline in the overall economy.
Submitted by Jerry Hoffman on April 25, 2008 - 7:04pm.
Just a couple cents worth.
The Liberty Newsprint financing idea is just too myopic and simplistic, not to mention it assumes acceptable housing is available at the projected rates. This is a big country with a wide range of affordability in out local market.
Everybody expects the government to fix the problems greedy people/institutions cause. Anybody recall the RTC of the '80s? The banks created the problem, they need to get the country out of the mess they created.
Real Estate kept the anemic economy afloat over the past several years. The market was fueled by lenders giving money to anybody who could (to borrow a previous phrase) "fog a mirror". The lenders decided it was OK to give people money, paying interest only, with backend ratios over 50 & 60% - Allowing borrows to do this with credit scores below 600 was just piling on. I believe the fallout was both predictable and expected. Sure the mortgage foreclosures will put a huge dent in things, but lets implement "risk based pricing". The people with the low scores aren't a good risk and lenders won't give them money anymore. So lets charge the good borrowers! FICO of 620-720 pick up the tab for the lenders. Ray Charles can see that is a majority of the population of borrowers. So instead of raising the rates and scaring everybody and taking the heat, lets keep the rates artificially low at least in public, and slam them with the less visible risk based pricing. By the way lending CEOs you can still reap the obscene salaries and bonuses. Middle america will continue picking up the tab.
The sane ratios of years past worked exceedingly well without risk based pricing.
Home ownership is a right not an entitlement. The NAR's advocacy of making it easier for everybody to get a mortgage by relaxing qualifications is a fundamental cause of this mess. Making it easier for people to get a mortgage they can't afford, is not in any way a benefit to real estate, the economy or the public at large.
Eliminate risk based pricing; return to practical lending guidlines and accept that not everybody will be able to afford a mortgage; keep banks out of real estate; Legitimize appraisals by keeping them totally independent of lenders. Stop trying to get rich quick and accept that steady, sustained growth (however slow) is better than artificial appreciation through manipulated demand.
Banks caused this mess, let them fix it without our help, or cheating good buyers with risk based pricing. The banks should fix it or fail. The forest fire of failures will bring forth new, robust growth, without the smoke and mirrors.