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The Lenders Sober Up

Written By Brian Hicks

Posted August 7, 2008



Here’s is a great story about what is going on in the “real world” of mortgage banking these days.

The lenders have sobered up and put away the booze.

From the USA Today by Anna Bahney entitled: Mortgage rules changes skewer some sales

“The deal was to close on June 27.

Drake Paul, a pediatrician, entered into a contract at the end of May to sell his two-bedroom, one-bath newly renovated house in Sparks, Nev., for $170,000. The buyer had lender approval, the appraisal was done, and the inspection checked out.

Then the lender called: Mortgage requirements had tightened, and the buyer no longer qualified for the 5% down payment for which he was approved. Only 48 hours before he was to sign the papers and get the keys, the buyer learned he would need to put down 20%, jacking up the initial payment from $8,500 to $34,000.

“Who can afford that?” asks Paul, 37, whose property is now back on the market after the deal collapsed. “A person that can afford a $170,000 house does not have $34,000 in cash. It just doesn’t work that way.”

Both buyers and sellers, such as Paul, are being caught off guard by a rippling wave of mortgage changes. Lenders are responding to the crisis in their industry by suspending mortgage products, raising required down payments and imposing a premium on loans in regions they deem to be “declining” markets. Even when they announce the changes, the message sometimes doesn’t get to the mortgage broker until nearly the last minute.”

“The underwriting has really tightened up,” says David Olson of Wholesale Access Mortgage Research and Consulting. “Before, if you could fog a mirror, you got a loan. Now, that’s not the case.”

In Olson’s estimation, at the peak of the housing boom, roughly 20% of the mortgage market was subprime, and nearly 20% was “Alt-A loans” – or “A-minus” loans, typically for those with good credit but with high debt-to-loan ratios or little or no proof of income. Both categories are now nearly extinct. That means about 40% of the residential mortgage market has all but disappeared.

“I don’t have the hours in the day to read all the changes that come in every day,” Olson says.

“Buyers come in with confidence, and once they have talked with a lending practitioner, it’s like they’ve been hit over the head with a ton of bricks,” says Dean Moss, an agent at Keller Williams Fox and Associates Realty in Chicago.

The result? Some buyers who planned to take the plunge and buy are heading back to the sidelines.

Moss says that an increased down payment on a typical $400,000 house in Chicago gives buyers significant pause: “Now, you have to put down $60,000. Buyers are like, ‘I was scraping to get the $40,000. How am I going to come up with another $20,000?’ “

“In my opinion,” Moss adds, “the only people who have a shot in this market are those with no house to sell, who have a good income – maybe two professionals – and have a good down payment. They can name their own ticket. That’s a small percentage.”


So why am I so negaive on housing? It’s simple.

People that can’t borrow money don’t buy homes.

This is one party that won’t be repeated.