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One Dead Goose and Another Loan Goes Belly Up: How Declining Value Restrictions Hurt Property Values

She leaned against the doorway of my office, this messenger of bad news, like so many before her had done. My consolation prize? A large Butterfinger, which had been placed on my desk before she retreated quickly back to the doorway. She didn't dare to sit in the chair (and consider herself a guest in my office).

I guess bad news is easier to deliver from a safe distance with chocolate on the table. I should remember this.

She was the rep that had been dispatched from Bank W to tell me that another one of my loans had bitten the dust. You would think by now that collectively, we in the mortgage business would be immune to bad news. But they haven't yet invented the antidote for explaining to a 784 credit score buyer with 20% down (along with his Realtor), that this loan just blew up.

Denied? Oh no. Our client is fine. But Bank W has decided in all of their infinate wisdom, that our county only deserves 70% loans, not 80% loans. He will just need 10% MORE money down on his $1,300,000 house.

Do the math. This deal is toast.

Go put a red D in blood on the door of every house. WE'VE BEEN DECLARED A DECLINING COUNTY.

Now, our whole county is actually NOT declining. In fact, we have some of the most coveted real estate in the entire country in our county, where access to San Francisco is minutes away, balmy weather is the rule, and million dollar properties have multiple offers.

But these cities, these rare areas of healthy real estate, will be DRIVEN TO DECLINE by these policies. These areas are victims of REVERSE DISCRIMINATION. These areas must pay the price so that those other areas (with foreclosures) do not poison the bank's ailing real estate portfolio. Why? Just because they are in the same county, all of which has been painted with the same declining value brush. How many buyers were wiped out by that single brush stroke?

Fewer people who can get loans = fewer buyers = more unsold houses = declining values.

And there you have it...what is really causing our industry to remain at a standstill. The other side of this coin is a foreclosure epidemic being fueled by people's inablity to refinance for the SAME REASONS: lower values being fueled by stricter lending guidelines creating even lower values. I know. Its a chicken and egg thing.

So as I unwrapped my consolation prize, I asked the rep why they didn't use zip codes instead of entire counties for their declining value policy. Her answer? "Oh, no, that would be redlining!".

Why is it that it is okay to kill the goose that lays golden eggs because there is some rotten old chickens about a half hour East of Eden?

Written by Janet Guilbault, California Mortgage Expert Based Out of the San Francisco Bay Area

Posted by Janet Guilbault California Mortgage Banker/Broker on 05/01/2008 12:52 AM

Comments (66)

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66 Comments on One Dead Goose and Another Loan Goes Belly Up: How Declining Value Restrictions Hurt Property Values

APR

2008

what does not make a lot of sense..is these banks who have these foreclosures..need to get them off their books...won't lend money to people who want to buy them......I suppose fear is getting them back is more than the desire to sell them...go figure

Janet - Excellent post. How do they expect the housing industry to recover when the banks aren't willing to make loans to good buyers? It is a vicious cycle for a downward spiral. Prices are now affordable and I believe the market would recover if only people could just get the loans to eat up all of this excess inventory.

Lisa: I was trying to explain why low prices and low rates have still not pulled us out of the much. Downward sprial is a good description.

Konnie: I think fear and over-reaction could be a great description of the lending world right now. But their ideas are keeping a great number of buyers from buying, and making values go even lower.

Janet: You're right on the nail with this one! While we here in St. Louis haven't gotten the scarlet "D", I can imagine what you're dealing with there! The saddest thing about property values declining is that they don't have to be! The housing market....even in the most over-heated of markets... is fundamentally strong. Housing formations and the population keep going up. There was a reason that the markets that over-heated did so. Because they were desirable!

If they "fix" the credit markets, the housing markets will come roaring back and there will be no need to paint scarlet "D"s on any body's front door!

Bob Mitchell

ValueList Real Estate Services, Inc.

Bob! Completely agree. We are paying so dearly for the fact that the lenders are losing their shirts in their mortgage portfolios.

My point is the over-reaction is causing more damage. It is like taking even more pills because the first pills caused side effects and now you need pills for the side effects.

We will know exactly when the whole crisis begins to end. It will be when banks decide to loosen guidelines.

Janet, That's incredible!! These buyers are like gold and they can't get a loan. It just seems that writing good loans like this would be a huge benefit to the lenders to help offset a some the losses being incurred. I just don't get it.

BB: It is not that they don't want the buyers. They don't want to risk THE PROPERTY going down in value. They have already figured out that high loan to values trap people in houses when values decline. This is because they have no way to refinance or sell when they owe more than the house is worth. They now know this formula is why there are so many foreclosures.

Now you and I both know that the chances of this guy defaulting are nil. But what we don't know, is how much further will the house go down? Its gonna go down alot more if they keep making it so damn hard for the people to buy these houses.

It is hard for everyone to realize that THE PROPERTY HAS TO QUALIFY NOT JUST THE BORROWER.

This is the new reality. it kills me to try to explain this to a borrower. They take it personally. They shouldn't but they do.

Janet: I agree with you and it's frustrating. I would bet that in 6 months or so the lenders will start to loosen their guidelines. So we need to hold on until then. Good luck-keep on plugging. The loans are out there!

Paul

Janet, In a market where we are trying to turn it around, where we are trying to put a positive spin on the housing market, we have the investment banks/investors running scared. In a way, I can't blame them. And, I am hearing rumors of more tightening. AJ

AJ: I don't think there is any doubt at all that there is more tightening to come. When every Monday morning brings a whole round of new restrictions from higher credit required, to lower DTI's, to declining values lowering LTV's.....

I have to quickly apply to all my loans and do damage control. It sucks.

Paul: Would love to know why you think 6 months? I was thinking this thing would start to turn around when they finally stem the tide of foreclosures. Thanks for the encouragement. It actually helps.

There will be no loosening...if there is, we are going to see the TBA market (those that purchase mortgage backed securities) cry foul and demand risk based pricing...8% 30 year fixed anyone???

That is scary, 20% down and they can not get financing. I rarely have a client with as much as 20% down. Thank goodness our market is not having near the problems.

Hi Randy: I know...try explaining this to a client who has never made a late payment in his life.

Drats, Drats, and double Drats! That's rough, even with the Butterfinger (second fav to Snickers!). Remember the day whe a loan was a loan on individual merit alone? When common sense prevailed? When 'redlining' was a center city thing? Now the dreaded scarlet D is everywhere! We have counties in northeastern PA that wear the scarlet D even though they have expirienced little if any appreciation in the last 4 years! There seems to be little rhyme or reason to much of anything in mortgage lending these days. In the end, somebody is going to make a ton of money when they stop putting fingers in and start rebuilding the dike! Also don't think Rich is too far off. 8.0% - 30 year fixed is not too far away. Feel your pain Janet. Enjoy the Butterfinger!

Great Post Janet. Please let me know when you get any indication that the guidelines are loosening up. I love your format of your posts and your pictures. I need more experience and training on that part of it. I think we all have to keep plugging away and think POSITIVE. It will turn around!

by ROXANNE SCHILLING, REALTOR AT LAKE TULLOCH

I cannot believe her answer to why they're not going by zip code. Un flipping believable! So why don't we just make the market even worse for everybody. At this rate, I'm going to have to organize prayer meeting JUST to pray for the economy!

MAY

2008

Janet,

Oh my, sorry to hear about this situation. My son has a home for sale right next door to Walnut Creek in Concord, yours is a lovely area. I would imagine he doesn't have any idea at all. And you know things like this spread...it could happen anywhere.

How about a big red "R" for 'redlining', Janet? Maybe not completely but just rubbing shoulders with the notion? Could it be possible that this beast is rearing it's ugly head all over America now because of the vise grip on lending? If a property is even caught up in the proximity of an area where that new 5% or 10% deduction for declining values is in effect could it get caught in the net? Whether it was a 10 thousand or ten million dollar home? Whew...I see some disparity issues about to manifest themselves on court house steps, all over the red, white and blue, especially among the minority and economically challenged searching for housing and financing.

Do you really blame the banks. Would you loan your money in some of these circumstances. I would not the way home prices are falling. The banks sometimes have to err on the side of caution now that they have lost millions of dollars on bad loans

I have been hearing of this more and more to a point where the buyers are either walking away or the sellers are having to give a concession in order for the property to close. I agree that some of these new loan restrictions are getting out of control!

Excellent delivery of the message. I am experiencing the same thjing here in Monterey County. It is very scary! Monterey is a very beautiful area that I would like to keep that way. Home values are declining and I am wondering when the prices will start to climb again..at least a little.

Another great blog! This is another reason to have more local banks and institutions that know the areas they serve and are part of the community. Rapid consolidation for big profits often does not lead to profits but to a decrese in customer satisfaction and value. You look at Airlines, Banks, ect. Lets keep a balance.

Stimulating the economy not shutting down the economy should be the mantra at mortgage companies. I live in a unique waterfront community in a county and a surrounding zip code that has been hard hit by foreclosures. Our community has a few but nothing compared to what surrounds us. But we are also lumped in with the big D and are starting to feel the pinch of the new mortgage rules. I know appraisers are on the line but I would think knowing that one area is unique and reflecting that on an appriasal is important to keep sales moving.

We have had the bloody red "D" hovering over us since the turn of 2008. You are absolutely right about the chicken and egg thing. You will see values decline even more until they hit the sweet spot. I do BPOs for the banks and it is AMAZING how everything has switched to CASH, FHA and VA financing around here! Conventional is rare to see!

Banks are also exercising due diligence to make sure when someone says "owner occupied" that they are "owner occupied" because we saw a wave of many NOO go down the drain (get foreclosed on.) I am freaking out just a bit because the new wave of foreclosures we are seeing are people who extracted equity out of their homes for whatever reasons OR to buy another home are letting them go. Home equity loans or lines are going to be a joy (NOT!) for you LOs in the future. I also have a feeling that people who are buying second homes or moving up and keeping their existing homes are going to feel it soon.

The banks are a huge part of the problem, but the biggest issue is no one has put aside money to have a large nest egg anymore - we don't save (we didn't have to), we were used to easy credit (it just kept getting easier) and the fallout is all across the country. I guess it's time to pay the piper, but ouch, ouch and ouch for people who have done a nice job paying their bills, maintaining their homes, being diligent to keep their promises.

It will work out in the end (I wouldn't put a date on it), but it's really FRUSTRATING, BORING and UPSETTING right now.

Can I have 1/2 your Butterfinger?

Scott, that Butterfinger was gone before the rep even left. My policy is ALWAYS to deliver bad news to Realtor and client the minute I know about it, and that chocolate jumpstarted those 2 calls. I remain amazed at the amount of understanding and compassion the world now has for those of us who arrange financing.

They already know it isn't easy. They know anything can happen. They know placing an application even with pristine credit is still a roll of the dice. And even though my other policy is to be the whipping boy, and accept all blame, I am rarely in that place any more.

My owner would agree on your 8% figure....he talks constantly about a sense of urgency...meaning doors are closing faster than we can get through them. The longer people wait, the more doors will be closed.

The reverse of this is: as soon as a few doors start to open, it will be like a floodgate. Be prepared. There is SO much pent up demand for real estate.

Roxanne: Your attitude is the best, and I share it. I want to be there when the floodgates open, and those of us that stuck it out are still here to reap the benefits.

I am here to help you with your blog. Let me know when you have about an hour and I will show you how to do pictures and make it pretty. In the meantime, go take some pictures of our favorite place and load them on your computer.

See you this weekend?

Lisa: You are the first person to mention the redlining comment. I was floored as well. This is the classic case of the the medicing killing the patient. The rep when on to say this:

"Banks think the prices of homes still aren't low enough".

Well, congratuations! This will be driving prices even lower and sink the economy into a worse state.

Of course, banks don't think that way. What she meant was...

"The bank believes values will go lower in this county. To save our hiney, we have decided to lend less."

Banks can't lend money they don't have. They're choking on foreclosed inventory and every other call is an owner who wants them to write down a loan to get the owner off the hook.

Investors, the last stop for the mortgage industry, can put their money in any type of investment instrument. They're not limited to single issue mortgages.

Fannie and Freddie had to tighten because they're so corrupt they lost their ability to raise limits to keep up with the higher home prices and higher priced loans.

We're doomed.

Lynda: If your son's house is priced lower, good old FHA will allow the buyer to buy...they have no declining value policy.

Russ: I think you are correct to state that banks do not want to lend money right now. They are scared to death and their policies reflect this. Especially for the higher loan amounts.

Laura: Seller concessions are becoming far more common, good observation. I think everyone involved with real estate understands that these are difficult times and compromise is the name of the game. To prevent buyers and sellers grief, the best thing to do is have a loan already in place before the offer is presented. That is also become far more common.

Angelica: I love Monterey! You are so lucky to live there. I wonder if some people reading this see an opportunity to buy some of the most beautiful real estate in the world while these crazy circumstances have Calif. properties ON SALE. One day we will look back when this is over and wonder why we didn't scoop up the bargains while we could.

Must have cash.....

Eric: Well said, and this opinion has not been mentioned before. When they come up with some of this stuff, it is often so removed from reality that you wonder where it came from......keeping lending local would be one solution. Before this policy was put in place, there was definately a preference for the better properties. Whenever you discussed a loan the first question was always "Where's the house?" Then they would decided on a case by case basis how much they would lend, lending more where values were more stable.

Then somebody somewhere looked at some statistics, became alarmed, and issued a blanket policy.

That somebody probably has NO IDEA about the differences that exist within our county.

Great Post - In the end we are in uncharted waters. When someone enters uncharted waters in the night with a dimly lit candle they must walk very slow. When the light appears the pace increases and as we relaize the environment that we are standing in we begin to run. Much like a child learning to walk. Things will change at some point and you will quickly realize that you forgot what is was like when they could only crawl. Keep originating and keep plugging away. Professionals like you are hard to come by and when that light pierces through you will be there to enjoy it.

I am disturbed by this declining market trend. It seems to be driven by the mortgage insurance company and not the appraisers! This just doesn't make sense. I am also concerned about what standards they use to make such a determination. If they had objective standards they could just apply the declining market policy to those objective standards. I also hear that not all of the mortgage insurance companies agree on what is a declining market. What can consumers/lenders do???

Gosh, Lenn, doomed is a pretty strong word...double ouch. What I would like to know is what will break the loop that we are currently caught in? What happens that will cause values to go up, banks to loosen, and buyers to return.

I know HOW to identify it when it starts to happen, because I am on the inside track.

I am thinking it might be better to have HIGHER rates with looser guidelines. What do you think?

Matt, such a wonderful analogy, thank you for that. It is hard to imagine we could EVER forget this crisis which has shaken our entire industry and our economy to the core. I think it will probably color our thinking and perception for the rest of our careers.

However, I do agree that when the light begins to shine, there will be many many people who will rush into the market and not enough people in the industry to handle the flood.

Just yesterday our owners went office to office asking everyone about their "committment". My answer was this, "Why would I torture myself like this if I wasn't 100% committed? I would already be gone!"

I have an auto leasing company that is doing fine and could go there and lease cars anytime. No thank you. As crazy as it is, I love it. Its my life. I'm hangin'.

Janet - Your right forget is probably the wrong word. I have not forgotten my children crawling either it is just a little blurred by the exciting things I get to see them do now:) Keep writing the well thought out posts and I will continue to ramble on in mine.

This is simply retarded. Is it a better gamble for the bank to take a buyer with let's say at 600 credit score on an FHA loan with the minimum down than this 784 credit score buyer with 20% down? The mortgage meltdown has created just a ridiculous panic. It just doesn't make sense. I feel for you.

After some areas started declining.... the media poured gasoline on the fire.

We are getting lots of updates on the declining areas from our investors.

It is really frustrating.

Any chance the seller could come up with the ten percent financing difference in something creative.

Good luck!

All the best!

Janet-------- These banks caused these foreclosures they are the ones that underwrote, approved, and funded these ultra aggressive loans. These banks knew that they had a built in default ratio and for every dollar you deposit they in turn invest it and make a nice profit. They caused this mess and its unfair that qualified borrowers such as yours have to suffer.

You should try running that loan via FHA they don't have a "declining market" guideline.

Eddy

The situation just keeps getting worse and worse - what's going to happen to some of these communities? People still have life-altering events that require buying and selling homes. Surely, if our industry could figure out a way to survive the 17-18% interest rate mortgages of the 70's we can figure out how to deal with this.

Foreclosures = more houses on the market = decreased values = fewer buyers willing to buy until values stabilize = more unsold houses = more declining values = more people upside down on their mortgages = even more foreclsoures = even more houses on the market = even more decreased values = even fewer buyers willing to buy until values stabilize ... and the spiral continues.

At least FHA doesn't factor in declining values. But it looks as though the mortgage balance will be too high even for FHA. Maybe the home seller can carry a 2nd mortgage for the 10%?

Lewis-------- Great equation it couldnt of been explained any better. I gave Janet the same recommendation in regards to FHA, hopefully it works out for her deal. Here in southern california sellers are not willing to carryback a 10% lien. They feel that wont get repaid, the are thinking just like the banks are.

Eddy

FHA can go to 729K in our county. But this is no help with a 1.3m house.

I can place this loan with another lender, but can I close it fast enough before they come up with some other reason they don't want to loan money.

Sometimes the state of the finance world is beyond frustrating, It is damn scary. The spiral you are writing about is like a never ending loop. What will break this up and head us in a better direction? It isn't about low rates or low prices....we already have that. It is about banks being hurt so bad in the mortgage business that they have no desire to lend...

Eddy: I didn't know that info you just shared about the second loans, but I can see how that would be the case.....

Are you writing equitylines or 2nds at all?

Janet: Great post and once again a classic example of why banks should NOT be the only source for mortgages. Fortunately I have never relied on banks, our major source is out side lending, private large groups investing in real estate. Their rates are better and they manage their portfolios, they can do stated income because they, as investors understand the borrowers desire for privacy. And they also understand assets/verified. They are not afraid to get into the real estate market today. I can do $3M stated/verified, pledged assets, you name it it's available. As far as any loan up to $417k the rates are great, new conforming loan limits, a clear joke under the guidelines but fortunately I don't have to deal with the Banks.

All of California is considered a "distressed market" what has to happen is lenders need to get a grip on reality, use silent seconds to assist the homeowner rebound and guess what the market will rebound. Refusing to take responsibility for their actions will only exacerbate the situation. Patti - Capital Line Funding Group - CA

Got to admit, the butterfinger picture gave me the munchies, but back to declining markets its crazy how those are determined and unfortunately its like a new fad thats stirring up. The market always seems to correct it self we just got to ride out the storm and think of solutions instead of sitting back and waiting for something to happen.

Janet - Hey would you mine sharing the info for the lender. We have a 2.2 purchase that we are trying place 20% down.............

OUCH... Can they do that? We have not had that happen in this part of the country. You took the news so well. So were you the one that had to inform the borrower and the Realtor?

Donna: Oh yes, they can do this and they have done this. Yes, I was the one who had to deliver the bad news. This is not easy, but the easiest WAY to do it is to do it quickly and with the attitude of "Now, on the plan B....hang in there, I have not given up on this"

Matt: In what county??????

Justin: Is it within our power to come up with a solution when a bank makes a decision like this? I don't know how they decide which counties are declining. Appears to me to be the ones where real estate is the most expensive.

The banks are in a no-win. If they do it by county, it is painting with too broad a brush. If they do it by ZIP code... it is still a pretty broad brush, and might be redlining. If they do it by subdivision... they are no longer painting with the broad brush... and they might be looking at a lawsuit.

Ah....the D....it has hit here too. I received an email from a lender saying it had happened and was causing havoc on appraisals.

MAY

2008

Janet--------- yes i am still doing seconds but i am maxed out at 75% CLTV. A couple of lenders are offering combos but the ltv is maxed out at 90%.

From my experiences sellers are just unwilling to carryback a loan in a sales transaction.

Eddy

Something doesn't seem right. Is this stated income? I can see 70% on stated but not Full Doc.

Janet, this blog post illustrated the real life effect of these latest changes so well that I chose to highlight it on my outside blog, Focus On Crofton.

Eddy: Do you know anyone who will do a 90% combo when the CLTV is over $1m?

Random guy: Because loan amount is higher, most lenders already only want a 75% loan. Declining value hits are usually 5% taking these loans down to 70% LTV. This was one of the last lenders I had that would bewilling do a million dollar plus loan at 80%. By knocking it down to 70% they really just came in line with all of the other banks.

I only wish I HAD a lender, ANY lender that would do a stated loan above a million. There are files on my desk right now that would turn into loans.

Margaret: Going over to check it out now. Thank you!

Lane: Last night while walking the Akita dog (must walk after dark...he's kinda scary looking) my husband and i were talking about our respective situation.s...he runs the family auto leasing company...and deals with auto financing.

His comment was this "Why would banks want to put all of their eggs in the mortgage basket when the eggs already in there are rotten?"

I thought this was a perfect description of the situation. (I know, he should blog with comments like this, but claims one blogger in the family is enough)

Janet, what a shame ! Ann Arbor is considered declining too so the appraisers are taking 5% off every appraisal. That hurts too. I tried to refinance a year ago and couldn't with a 720 CC, it appears I had to have 724, so we paid off some stuff, closed some cards we didn't use and 6 months did a cash out refi. But, I was NOT happy at the first news.

Janet I will find out for you it is one of colleagues.

Janet----------- I will look into it. Is this scenario in northern california? Is the property considered in a "declining" area?

One last question if the property is in a declining market is the 90% CLTV after the 5 % reduction ?

Eddy

So this is a Full Doc loan, 784 score and the best brokers have available to them for super jumbos in a declining market is 70%?

MAY

2008

Other Random Guy: It was the best I had to offer before the bank wacked its LTV to 70%.

What good fortune that he has a broker like me with many other lenders to choose from.

I always have a plan B up my sleeve. Especially in this market. This loan will get done.

Eddy: property is in Alameda County. 90% has NOT taken into consideration any declining value hits.

Some banks do think Alameda is declining.

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