* * * *   HARD CORE REAL ESTATE TALK  * * * *

IT'S BEEN A ROCKY 2-3 YEARS.   Many real estate agents are working twice as hard for 1/2 the money, and they're the lucky ones.   Many loan officers spend weeks documenting, getting approvals only to have a loan denied funding the day before closing.  No one ever really learns why but the implecation is always that the borrower didn't qualify for one reason or another, more documentation, more money to close, house in wrong location.  I love that last one, house in wrong location.  A few years ago, many of these loans would have been approved and worthy home buyers would be moved in to their newly purchased dream home and making payments timely.

WHAT HAPPENED?  PERHAPS THERE IS JUST NO LOAN PRODUCT TO FIT THE NEEDS OF TODAY'S BORROWERS. 

REMEMBER THE ALT-A?  A LOAN PRODUCT REVIVED FOR A NEW MARKET.  When did we first learn of the Alt-A loan?  Seems to me it was sometime in 2002-2003, although I'm not sure.  I got an e-mail from a loan officer with whom I had done a lot of business over the previous 10 years. 

Lenn
Contact me about a the Alt-A loan product.
Alt-A loans will help buyers with good credit without income documentation.

The Alt-A was not a sub-prime PRODUCT.  The loans were purchased by Fannie Mae.  They met a need for consumers who "didn't quite fit the traditional loan PRODUCT". 

Interesting, I thought.  Goodness, this loan product must have been designed for some of our home buyers.  In the previous few months, we had prospective home buyers interested in taking advantage of falling interest rates but who couldn't document sufficient income to qualify for the price range in which they wished to buy.  These buyers were either self employed contractors, business owners, sole proprietors, private duty nurses, software company partners, tipped workers, etc.  Many of these borrowers had been offered sub-prime loans because they couldn't adequately document their income.  These buyers were almost all self employed, some with incomes to qualify at conforming rates or FHA but didn't want to pay the high mortgage payments with the sub-prime rates.   The Alt-A loan PRODUCT was meant for this group of home buyers.

Primarily credit-score driven, the Alt-A loan product alleviated the limitations and due diligence headaches associated with documentation as well as assets and income verification. Translation:  If the credit score was high enough, the loan would be approved.  The borrower would pay a premium of 1/8 to 1/2% for the same interest rate, but they could buy their dream home.  Actuarial models had proven over and over again that borrowers with sufficiently high credit scores, 720 or above, were good risk borrowers.  WHAT?  No due diligence on the part of the loan officer/lender/investor???  Exactly.  The interesting thing about the Alt-A and similar loan products is that the guidelines do not require that the loan officer/lender/underwriter show that the borrower have the ability to repay the loan.  Such a deal! 

Of course, we know what happened.  The guys on Wall Street got greedy and designed a series of loan PRODUCTS that would permit more and ever more buyers to "qualify" but who didn't have to demonstrate the ability to repay.  As long as Fannie Mae would buy the loans, bundle loans, chop them up and sell them to ever widening pools of big monied investors; investment bankers, hedge funds, sovereign wealth funds, etc., who knew that, as long as the American home owner continued to make their mortgage payment, their mortgage backed security was a safe investment. 

Alt-A Loans are defaulting left and right. 

What a difference 3 years make.  When home prices increased almost 100% in 4 years, the entire landscape of home buying and mortgage lending changes.  

• Folks who wanted to sell could not.
• Folks who wanted to buy could not.
• Mortgage brokers lost investors.
• Mortgage companies tightened guidelines.
• Fannie Mae ran out of money. 

YOUR LOAN IS NOT APPROVED!!  An interesting thing happened when Fannie Mae ran out of money.  Rather than admitting their incompetence and perfidy, they severely tightened the mortgage loan guidelines in an attempt to shift the blame for the lack of mortgage funding ability to the consumer borrower.  Loan officers were caught in the middle.   They knew the borrower met the guidelines when the buyers were approved.  The guidelines had become a moving target.

Fannie Mae and Freddie Mac ,who were experiencing monumental losses, falsified their  to be able to continue to borrow at advantageous rates to continue to buy loans on which no one had established the ability of the home owner to make their mortgage payments.  Of course, those same falsified financials permitted the Director, Franklin Raines, of Fannie Mae to receive multi-million bonuses. 

In 2004, $100,000 income qualified the average home buyer for a mortgage loan of about $525,000.  Many home buyers could qualify for 80/20 loans with $ZERO down payment.  As long as the credit score was high enough, a family could buy their dream home and qualify for a loan LTV of about 30-35% and often higher.  No longer did the ratios have to meet the traditional 28/36 test.  Millions of families took advantage of the liberal qualifying requirements.  Real estate agents sold a lot of real estate.  "Ah!  I remember it well." 

In 2007, $100,000 income qualified the average home buyer for a mortgage loan of about $400,000.     Not only did the 2007 home buyer qualify for a much lower mortgage due to rising interest rates, the homes had increased in price almost 100% between 2002 and 2006.   The 4 bedroom Single Family Colonial on a 1/4 acre that was available in 2003 with a $100,000 income was now a 3 bedroom Town Home for the same $100,000 income.  Not only that, the buyers needed a down payment and a higher credit score to qualify for any loan.  Not only that, many buyers were pre-qualified, qualified, pre-approved, approved, provided a loan commitment, etc. only to find out 2 days before closing that their loan was not funded and their broker couldn't find an investor.  Or, they got to the settlement table and found out that they needed another $4,000-$10,000 to close.  Why does everyone look at the real estate agent when that happens??

The above does not compare identical loan instruments because many of the loan instruments available in 2003 no longer existed in 2007.  Home buyers are often less interested in loan types than the monthly mortgage payment.  I love the American home buyer, but I do not give them any credit for understanding market value or mortgage loan products.  The consumer is focused on the monthly payment.  When it is low they know they can make it.  The fact that the payment will increase substantially is rarely the focus of the borrower.  They fully intend to refinance out of the ARM but need it to qualify to buy their dream home today.  There's a bit of Scarlet O'Hara in most of us.   The American consumer is also very optomistic and very trusting of mortgage professionals.  They have to be.  They don't understand what is happening.  Just give me my house!

WAIT, IT GETS WORSE!  For the first time in the history of the real estate market, not only did the home buyer / borrower have to qualify for the loan, so too did the property.  Remember the "DECLINING MARKET SYNDROME"?   Homes in some neighborhoods that had declined in market value or were thought to have the potential of declining in value at some unknown time in the unknown future, THROUGH A PROCESS OF DEVALUATION, were denied appraisals and the loan was denied. 

This was the most illogical force in mortgage lending in my memory since racial red lining. 

By about late 2006 to early 2007, home buyers looked at what they were qualified to buy and said "I don't want that piece of junk".   They stayed where they were and are just now coming back to look at the market, albeit, very, very slowly and with a lot of trepidation. 

Sure, it was a buying frenzy.  Prices were going up.  Interest rates were going down and, suddenly, families realized that it was an opportunity to buy in that great school district or buy that wonderful 4,500 square foot home that they had dreamed about for many years.  If they didn't buy now, they might not be able to next year.  Of course, there were many buyers who purchased with the clear intention of reselling immediately following settlement.  Not a small percentage of these investment buyers were in the real estate industry. 

WHAT HAVE WE LEARNED?  A few things come to mind.

Just as car manufacturers design new vehicle models to respond to consumer demand, the mortgage industry designs mortgage products to respond to market changes.  Innovation is a good thing.  New products and new ideas fuel the engine of free enterprise.  However, in light of the disaster that is the real estate industry and mortgage industry today, in the future, I suspect that most of us will be just a bit more careful, run those numbers, and if a buyer doesn't appear to qualify and show the ability to repay their mortgage loan, let them know it.  Mortgage providers will advertise to attract buyers with attractive rates and terms.  Let's face it, REG. Z doesn't do much to protect the consumer.  Show them the numbers for today and also for 3 years from now.  Run that amortization table.  It's an eye opener for many prospective home buyers.   

Courtesy, Lenn Harley, Broker, Homefinders.com.