The several years of “loose lending” by mortgage lenders helped bring a surge of bad loan programs with borrowers that were either overextended from Day One or should have been unqualified to begin with. This surge has now become a tsunami of foreclosures and short sales, which Jeff Allen and I have lumped together as the term: “Lender Mediated Sales.”
Now that lenders, banks, retirement funds, investment bankers, average investors and everyone else have all been bitten by the fallout from this housecological disaster (like my new word?) we find ourselves trying to change our ways, reduce our foreclosure footprint, and move forward to a more sustainable-housing-market future.
The problem is that while there seem to be a large number of borrowers ready to purchase houses in recent months, it is now these same lending institutions hobbling our housing market.
It starts with short sales: lenders were willing to give 100′s of thousands of dollars to anyone with a heartbeat at a moment’s notice but now take MONTHS to tell you if they’re willing to accept a buyer’s offer on a defaulted borrower’s house… which more times than not is a far better return on their investment than letting it go through foreclosure. The buyers willing to sit on the housing market sidelines for MONTHS while they wait for an answer can wind up the owners of an excellent property at a great price, but few buyers (or their agents) have the stomach for it.
On REO, aka lender owned, homes we see banks still take a week or more to respond to many offers, sometimes haggling over unrealistic sales prices, and so many pages of disclosures and addendums that do everything possible to leave the buyer with an “I just got violated” feeling when they receive the counteroffer from the lender. Some of these bank addendums are so ridiculous that you roll your eyes the whole time you read them.
Many of these lenders do not provide listing agents enough incentive (i.e. money) or oversight for them to do a good job marketing the house (i.e. some interior photos, a new picture when January snow becomes July grass, room dimensions, a phone number with a real live human person, timely responses, an MLS description that says something other than “bank owned,” ACCURATE association fees and tax information, etc.). When buyers have 100′s of houses come up in their search, it is easy to ignore the listings that show nothing, tell nothing and mean nothing.
Assuming that the house is not a short sale or a foreclosure, lenders are still finding ways to get in the way of a good borrower buying a good home. This is the area of the market that I’ve become the most frustrated and cynical about recently. Here are some of my favorite lender fouls lately:
- Mortgage Insurance Company Changes Downpayment Ratios and Doesn’t Tell the Mortgage Company
A BIG mortgage insurance company decided to stop insuring loans with down payment ratios over 90%, but it said that the special state-supported first time home buyer programs (many at 3% down payment) were not affected. A day before closing the mortgage company calls the mortgage insurance company to get the mortgage insurance certificate (which seems way too last minute for my taste) and is told: “sorry, get your borrower to come up with another $14,000 by tomorrow.” Apparently they decided not to give special consideration to the first time buyer programs and never told the mortgage company. - Underwriters Didn’t Look at File Until 24 Hours Prior to Closing
A loan officer had everything in a week prior to closing and the underwriter waited till the day before closing to review the file and came back with a ton of conditions that took days to fix. Heaven forbid that we know these things in time to fix them without a delay in closing. - Loan Packages Showing up Almost a Day Late
File gets underwritten in time and for some reason the loan package sits on the processor’s desk for a day instead of being sent out as it should have. - A Continually Moving Target for Loan Programs
It seems that nearly every day the loan programs are tightening up with more requirements, tighter guidelines, and more downpayment needs. Most conventional loans were still 5% down until just recently… now almost everything is 10% down (due to the tightening mortgage insurance issues) and I think it is quite likely we might see that get even worse given the continuing high number of defaults on bad loans from years ago. The only “sure thing” right now is good ‘ol FHA… 3% down now, 3% down tomorrow, 3% down hopefully forever. While you can sneak by with a 0-down FHA loan, I believe FHA will try to quash those options again this year… which would be fine if FHA could come up with a 1.5% down payment option @ a higher mortgage insurance premium.
You take all of these obstacles in the way of today’s home buyer and it is a wonder that our housing market has been doing as well as it has as of late. These home buyers start out excited and optimistic about their upcoming home purchase and end up exhausted and jilted about the process when it is all over. This week I had two buyers almost ready to give up entirely and walk away from great houses at awesome prices because of all the problems with their financing. These were great human beings and qualified buyers that were being beaten up over things that were not of their doing. I think we’ve come back from the edge of the cliff at this point but it is tough to watch your buyer suffer while you stand powerless to effect any real change on the situation.
Don’t get me wrong, there are still a lot of homes selling right now and many transactions never see these problems, but in my conversations with agents all around town, it seems that almost every transaction takes 2x-3x more work and pays far less than it did 3 years ago. Some may call this paying our penance for the “good times” of prior years or a needed cleansing of a bloated industry. Either way, this current housing market’s impact is becoming more pronounced every day.
Until we can get lenders to get their act together and be timely and consistent for a change, I see the current troubles only prolonging a difficult housing market.
Got a story? Feel free to add it via the comment feature below.
Aaron,
I know what you’re talking about from personal experience.
My fiance and I were pre-approved for a conventional 5% down 30 yr fixed. We found our house and now had begun the ridiculous process of getting the mortgage. About two weeks in (mid May), our lender tells us that Fannie May had changed the rules and we now needed another 5% down if we wanted to stay conventional. This freaked out the sellers who thought we were just jerking them around by changing the financing. By the end, we the buyers, had to call the sellers to calm them down and assure them we were still serious about buying the house. Then on top of that, after we had turned in all of our documents, the lender took forever to get our documents through underwriting. We did not have the most complicated file ever, it was all pretty basic. We wound up not closing on time (4 days later) because the underwriters had not yet looked at our file.
I put the blame in this case on the mortgage broker not handling the deal with the actual lender properly, and then the lender not handling the file in a timely manner.
Oh yeah, and then at the end, once we had switched to a 5% down FHA, in the closing documents, the lender forgot to provide for insurance money in the settlement statement. (I’m pretty sure that is a requirement of FHA loans, to include escrow, and fund the escrow in the closing fees). So, after closing, I had to go write a separate check to my insurance company in order to make sure my house is insured.
This was a terrible “first time buyer” experience. I am horrified that I will again have to venture into this morass sometime in the future.
Aaron while you are an honorable and trustworthy real estate agent. During the height of the boom you have to admit that there were far too many under-qualified unscrupulous people in the industry.
The barriers to entry in the real estate were essentially nill. I saw programs with 90 hour commitments offering licenses for agents and mortgage brokers…well they didn’t even require a license.
The entire industry was essentially one gigantic circle jerk. I saw it first hand in multi-housing rental industry. Every month we would lose residents that constantly missed their rent payments to home ownership. Folks that made 40k were buying 250k townhomes. Realtors, mortgage brokers/banks all were selling them down the line.
These folks could barely afford to scrape together a house payment let alone deal with a dead fridge or furnace.
I saw tons of folks pissed off because their RE agents and mortgage broker had failed to even ask them if they were in a legally binding lease let alone call us for due diligence. Sell them now…deal with that later:that was the mentality that I saw day in and out. A real estate agents responsibility to their client is to act in their clients best interest. Time and time again I saw residents whose agents were acting in self interest only.
Lenders like Countrywide and Ameriquest, they didn’t care, once the deal was done they packaged it up and got rid of it. Somebody elses problem…
I would be remiss to say that the people who borrowed past their means were not complete idiots but they were caught up in the machine, and it was a well greased one. Hell even the government was “selling” home ownership; it is “The American Dream” after all.
So yeah, now we are in a correction; lending tightens, housing prices fall another 15-25% to deal with tight credit, the economy stabilizes in mid 09 and we find a decent equilibrium buy spring 10. Its going to be painful till then but well get through it
I agree that there was blame all around, and there are still real estate agents out there that are causing problems for the housing industry. I’m trying to tackle these issues one at a time because I simply don’t have time to write a book about the whole thing at once
Thanks for reading and for your comment Ryan!
If a person cannot bring at least 10% down, they really don’t have the means to buy a house in the first place. If 10% is honestly too much for someone to bring to the closing table, what happens when (not if) major repairs are needed to the house? We aren’t seeing ridiculously high standards yet, just return to basic sound banking principles. Remember the good old days when one either had a full 20% down or one didn’t get a loan at all? A 3% down payment is a joke, and not nearly enough ‘skin in the game’ to secure a loan.
so the average home is what 230k or something…10% down thats a decent chunk of change for a first time home buyer.
23k upfront would sideline too many home purchasers…I am not saying that 3% is the right number, but take it away and home prices have to drop somewhere in the 30-40% mark to be affordable to the masses.
My parents always talk about the ridiculous interest rates and the 20% percent down…usually they follow it up with something like how they paid 48K for their first house though.
Ryan,
That is exactly why prices must fall to in order for realistic affordability to happen. The time tested rule of thumb is that the median house should be roughly 3 times median income. Median income in the twin cities is ~65k, that puts the median house at ~190k (very rough numbers). That’s another 20% drop in prices from where we are today.
If a first time buyer cannot raise 10%, they do what first time buyers have historically done… Rent and save until they have a down payment worthy of the name.
I guess we agree to disagree.
I just purchased with a FHA loan 3% down, it let me put around 5k in an ING savings account for just those unforeseen circumstances you refer too. I realize thats not enough so I will be adding to it as I save. If I would have had to come up with 19K I wouldn’t have been able to buy for roughly another 3 years, and there’s no way I would have been able to put any money aside.
I do agree with you that savings are an important aspect in this whole mess. But the sad truth is that the American economy is consumer driven and built on excess. I think the fix needs to be a stepped interval one or the entire system could easily collapse.