* * * *  WARNING, HARD CORE REAL ESTATE TALK AHEAD * * * *

WE HEAR SO MUCH THESE DAYS ABOUT THE LENDERS MORE STRINGENT QUALIFYING REQUIRMENTS FOR HOMES IN "DECLINING MARKETS".   This post was inspired by Janet Guilbault's post today relating an experience involving a mortgage rejection by an underwriter based on the new insidious "Declining Market Syndrome". 

Janet states, "Fewer people who can get loans = fewer buyers = more unsold houses = declining values."

SOMEHOW, THE MORTGAGE INDUSTRY HAS CHANGED IT'S MISSION FROM APPROVING BORROWERS TO  APPROVING LOCATIONS.   What's next?  Will the financial markets begin to issue FICO scores for neighborhoods?  Who invented the "Declining Market Syndrome"? 

WHO IS CARRYING THE BURDEN OF THE FALLOUT FROM THE MORTGAGE MESS? 

• DON'T blame the home buyers.
•      DON'T blame the real estate agents.
•           DON'T blame the loan officers.

IT'S THE INSTITUTIONS THAT HAVE FAILED US ALL.  

• Congress Failed us all.
•      Fannie Mae Failed us all.
•           Freddie Mac Failed us all.
•                The mortgage companies failed us all.
•                     Wall Street failed us all.

THE GOOD OLD DAYS OF REAL ESTATE PRACTICE.  Do you remember when selling real estate was fun?  Back in the late 1990s, real estate agents didn't have to worry so much about a buyer's ability to obtain a loan.    Once the Fair Isaac "FICO" credit scoring system was accepted and implemented, an experienced loan officer could pull a credit report and give a "YES" or "NO"for a buyers ability to obtain a mortgage loan, what type of loan would be advisable and what the PITI would be. 

"Come on Mr. and Mrs. Home Buyer.  The lender said YES.  Let's go find a home." 

The great thing about FICO Scoring was that it incorporated a system of "Decision Management" that automated, improved and connected decisions to enhance the loan approval process.  It worked.  Why did it work?  Because, based on actuarial like precision, the borrowers ability and likelihood of repaying their mortgage loan as agreed was predictable and reliable.  The higher the FICO Score, the less risky the loan.  Mortgage companies could manage their decisions with automated systems rather than rely on human decisions.  If experience teaches us anything, it teaches us that numbers don't lie. 

PRIOR TO SEPTEMBER 11, 2001, mortgage loans were easy to obtain, for credit worthy home buyers.  The home buyer's credit score determined the interest rate they would pay.  Lenders knew that risk could be managed by charging a higher interest rate to borrowers who had low credit scores and were, predictability, more likely to default.  Prospective home buyers were encouraged to maintain good FICO scores, make credit payments timely and save money for down payment and closing costs. 

FACT:  Easy mortgage credit leads to more mortgage defaults. 

FACT:  Most homeowners are making their mortgage payments on time.

DOES ANYONE STILL DOUBT THE IMPORTANCE OF A HEALTHY REAL ESTATE INDUSTRY TO THE ECONOMIC HEALTH OF THIS COUNTRY?

POST SEPTEMBER 11, 2001, with the Federal Reserve anxious to help Wall Street and all financial institutions recover from the horrific financial impact of the attack on our country, interest rates were lowered to historic low rates which eventually filtered down to the mortgage market.  With record numbers of home buyers in the market, mortgage companies were under severe pressure to approve more than just credit worthy home buyers.  The competition for mortgage loans encouraged lenders outside the normal A-paper loans to risker credit approval standards, boutique loan instruments and niche markets. 

The normal 65% of Americans who lived in owner occupied housing grew to 70% owner occupied housing. 

WHAT HAPPENS TO A MORTGAGE MARKET WHEN THE TAIL WAGS THE DOG?  However, that 5% increase in home owners were not qualified borrowers.  These new home buyers didn't meet normal underwriting criteria so the underwriting criteria were adjusted to meet the home buyers profile. 

Low interest rates brought record numbers of home buyers into the housing market driving home prices up as much as 100% or more.  As home prices escalated fewer buyers were found to be qualified.  Rather than the loan officers saying "NO", the financial markets invented new instruments to fit the home buyers' needs.  The easy mortgage market and rapidly escalating home prices brought many speculators into the housing market. 

FACT:  Many mortgage loans in default were obtained by fraud or speculation that home prices would continue to rise.  The plan was to buy the property, hold it for a year or two, often during the construction period, then sell it and pocket a significant profit. 

FACT:  Home prices escalated in response to low interest rates, institutionally neglectful underwriting, rubber stamp appraisals, home owners cashing out, home buyers buying their dream home. 

THE SAFETY NET WAS CORRUPT!  The institution that normally provided liqudity to mortgage companies failed in it's mission. 

FANNIE MAE MISSION

"Fannie Mae provides stability, liquidity, and affordability to the nation's housing finance system under all        economic conditions. We are a shareholder-owned company with a public mission. We exist to expand affordable housing and bring global capital to local communities in order to serve the U.S. housing market.

Fannie Mae has a federal charter and operates in America's secondary mortgage market to ensure that mortgage bankers and other lenders have enough funds to lend to home buyers at low rates. Our job is to help those who house America."

FANNIE MAE FAILED IN IT'S MISSION.  As the average cost of housing in many communities escalated to exceed the Fannie Mae maximum loan guidelines, lenders were forced to go to private invesstor resources for funding.  Fannie Mae was unable to accomodate the higher loan amounts.  Fannie Mae was under investigation for misstatements of it's financial reports and was unable to obtain higher loan limit authority.  To maintain liquidity, lenders sold their loans to Wall Street investors who bundled the loans and sold them as Mortgage Backed Securities.  When a percentage of the underlying mortgages went to default, the riskier securities became worthless.  The financial institutions that held the securities lost Billions of Dollars. 

I believe that the "Declining Market Syndrome" is an obfuscation invented to give cover to lenders who suffered massive losses through loose lending standards.  Lenders aren't making mortgage loans because they don't have any money.  Fannie Mae failed, Wall Street investors failed and the government hasn't a clue. 

UPDATE:  Joey Aszterbaum further obfuscates the financial market's actions in a retort to this post.  My comment on Joey's post is below.

You completely missed the point of my post. 

I have no objection to and welcome home prices coming down.  I've objected to agents and sellers who pollute our market with overpriced homes for over a year.  When prices are too high, buyers stay home.

Now that prices have come down and are continuing to do so, buyers who do try to buy are rejected, not because of the buyers credit or their assets or contribution to the transaction.  Buyers are being rejected because of an arbitrary and futuristic projection of the future value of the area in which the house is located. 

The coveted low LTV is not based on reality.  It's based on a fabricated futuristic model. 

I'll go further.  This model of requiring a higher down payment in geographic locations is a form of steering.  Buyers seeking homes in one location can buy with 5% down.  Buyers seeking homes in another area will need 10% down.  As fewer and fewer homes are sold, the contraction will accelerate. 

Fact is:  Buyers have what they have.  They don't have 5 or 10% more. 

Housing prices are declining and that's a good thing for the market. OR IS IT?  If houses in the declining areas can only be purchased by buyers with large cash reserves, that makes them move-up neighborhoods.  However, if the buyer's contingency is in a declining neighborhood, the likelihood of it selling is reduced by the higher amount of cash needed by buyers. 

I'm coming to the conclusion that this "declining market syndrome" is a form of social engineering and that is not the governments business.  How much of the public's home buying decision making do we want to put in the hands of lenders and appraisers??? How much do we need Fannie Mae, a corrupt institution, telling the public where they can buy a home???? 

By the way.  I looked at a list of zip codes in a few Northern Virginia areas this morning.  The closer we get to DC and other major employment areas, the more likely a zip code is designated as "declining".  Of course it's declining.  It went up higher.  Northern Stafford County is declining.  Culpeper is not.  Crimony, the market has always been soft in Culpeper because it's not within a commuting distance to employment location.  Stafford is and was an attractive buying location in 2004, 2005, 2006.  So prices when up.  Now that prices are declining everywhere, folks can't sell in Stafford because buyers would need a higher down payment to buy that house in Northern Stafford than a house in Culpeper at the same price.  

It's insane. 

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Courtesy, Lenn Harley, Broker, Homefinders.com, 800-711-7988.