You Want the good news first?

By Roger Cruzen

Midwesterners have been known to say, “If you don’t like the weather, wait a few minutes and it’ll change.”

REALTORS® are looking forward to a change in the real estate finance climate after a year-long credit crunch that has worsened the impact of a severely declining market. Those who make their living in areas most dramatically affected by the slowdown are hopeful that moves by Congress to help troubled borrowers and efforts to energize the Federal Housing Administration (FHA) and increase liquidity in the secondary mortgage market foretell better weather on the real estate finance horizon. Although some believe the worst of the storm clouds have passed, forecasters with their eyes on the skies warn that the outlook for real estate lending remains mostly cloudy with a chance of more bad weather, especially given the Federal Reserve’s and the Treasury Department’s efforts this summer to shore up Freddie Mac and Fannie Mae’s liquidity standing.

“Anyone who says they are certain about what is going to happen in 2009 is lying,” says Richard Green, Ph.D., a former Freddie Mac economist recently installed as director of the University of Southern California’s Lusk Center for Real Estate. “This continues to be a market that is experiencing a lot of uncertainty.”

All the Rules Have Changed

Since mid-2007, the only certainty in real estate lending has been that all the rules have changed. Subprime and 100-percent loan products disappeared and bankers won’t even look at a borrower with sub-par credit, an unverifiable income, or no down payment. Entire lending channels vanished as sources of capital dried up and banks reduced or eliminated their mortgage operations and weathered hits to earnings. Even confidence in the venerable secondary market flagged as underwriting criteria were tightened in declining markets—a move some say made matters worse.

The result of this uncertainty? A return to the fundamentals of real estate lending—and reliance on decades-old ways of lending to people who want to buy a home.

“One of the lessons learned from this whole thing is that a 30-year fixed mortgage with a decent down payment really is a superior product,” says Green. “I don’t know that we’ll ever see no-down payment loans again or, if we do see them, it won’t be for a very long, long time.”

Some say the chain reaction that followed the subprime mortgage meltdown was not all bad. “Now we have people who have skin in the game and actually care about what they are buying. It’s healthier for everyone involved,” says Molly Hamrick, chief financial officer with Coldwell Banker Premier Realty, a Las Vegas brokerage with 350 sales associates. “In 2004 and 2005, 60 percent of our buyers were investors. Today, we’re seeing families and buyers who are looking for a property to live in. It’s a different buyer, and lenders are looking at buyers differently. We’re doing more due diligence with buyers and having a much harder time qualifying them. You can’t push those back-end ratios as much as you could before.”

Lenders aren’t necessarily afraid of making a loan in Las Vegas, Hamrick says, but they are verifying employment and bank balances. “Escrows are closing more slowly and now the house has to qualify as well,” she adds. Second and even third appraisals are not uncommon in a market where half of sales involve bank-owned properties. Hamrick reports that 75 percent of her company’s business involves short sale or REO transactions.

Banks’ Losses Are Buyers’ Gains

On the opposite coast, the story is similar. “Derivatives are gone. NINJA (no income, no job…) loans are gone. Banks are suffering and buyers are winning,” concludes Barbara Watt, broker/owner of Century 21 Sunbelt Real Estate, a 600-agent brokerage based in Cape Coral, Fla., where prices have dipped in some areas to levels not seen since the 1990s, thanks to months of foreclosure inventory on the market.

Both Hamrick and Watt say lenders weren’t prepared for the avalanche of foreclosures despite considerable experience handling them in the early 1990s. “A huge amount of our business right now is being conducted with the bank, and that takes a lot of time and patience because you can’t get phone calls returned or you have two or three different divisions within the bank that aren’t talking to one another,” says Hamrick. The impact on her business was significant.

“At one point, only 22 percent of short sale transactions we opened actually closed,” Hamrick reports. Frustrated, Hamrick’s firm developed its own standardized short sale process rather than wait for the banks to create their own. Today, about 50 percent of short sales and 98 percent of Coldwell Banker Premier Realty’s REO transactions close.

To the Rescue?

With a growing number of qualified buyers attracted by bargain prices, REALTORS® expressed relief last spring when Congress temporarily increased limits on jumbo conforming loans and more stringent underwriting criteria for “declining markets” were lifted. But few would have predicted that the little-used FHA mortgage guarantee program would become the darling of REALTORS® and their buyers once its loan limits were raised.

The measures are intended to provide relief to buyers in high-cost markets and there is little question they will help. But Green believes the temporary nature of the measures may mute their impact.

“Until these changes are permanent, Fannie and Freddie won’t really gear up,” says Green. “Dropping the declining markets criteria will loosen things up a bit, but until Congress makes them permanent, they won’t have much impact.”

Looking Ahead

While forecasts for 2009 remain murky, REALTORS® can count on the fact that mortgage capital will become more expensive and lending will remain constrained until the market returns to equilibrium.

Not to mention that underwriting criteria will continue to force agents to work harder to help their clients arrange financing.

“No amount of financial innovation can overcome bad underwriting,” says Green. “If there is any innovation that comes out of this whole thing, it may be that perhaps we create an environment where everyone who touches a mortgage has some risk … where mortgage brokers are compensated for mortgage performance and not just for originating it, and where investment bankers and hedge funds also have some risk.”

Federal Remedies

With hope of a late-2008 real estate recovery fading, the eyes of American homeowners and REALTORS® alike are focused on the nation’s capital, Washington, D.C. That’s where the implementation phase of President Bush’s housing rescue bill is taking shape as America prepares to decide the first Tuesday in November who will inherit what arguably is the country’s greatest financial calamity since the Great Depression.

As ret2® (Real Estate Trends + Technology®) goes to press, the jury is out on whether Congress and the president have done enough to assist troubled mortgage-holders on the brink of foreclosure and ensure the future of mortgage giants Fannie Mae and Freddie Mac. The legislation is expected to assist some 400,000 mortgage borrowers facing foreclosure by allowing them to refinance into more favorable fixed-rate, FHA-backed loans. Skeptics say the bill falls far short: The lenders who hold these mortgages still must agree to write down a portion of the value of these homes, and many homeowners will still default on their loans even with more favorable loan terms.

REALTORS® everywhere also are watching to see whether the bill’s government-sponsored enterprise (GSE) reform provisions are enough to ensure the future viability of Fannie Mae and Freddie Mac. Officials at Freddie Mac are guarded in their optimism. “It very strongly reaffirms our position and our capacity to play a role in providing mortgages across the country,” says spokesman Brad German.

And there are nagging concerns that FHA and Ginnie Mae, which packages and sells 97 percent of FHA mortgages, may not be capable of managing the sudden and dramatic increase in loan volume and related paperwork, creating delays that could spell disaster for agents and their clients.

And bubbling just under the surface are concerns about the Federal Deposit Insurance Corporation following the July failure of Indy Mac Bancorp, Inc.

While some 2,000 banks failed during the savings and loan crisis of the late 1980s, those bank failures cost the fund only $6.9 billion. Recently, the agency’s list of banks facing potential problems had combined assets of $26.3 billion—an amount roughly half of the insurance fund’s first quarter balance of $52.8 billion.

Whether this cauldron of concern will boil over in 2009 is anyone’s guess. However, it’s safe to predict there may be additional efforts by Congress to shore up real estate’s lending infrastructure once the next president is sworn in.                     

Roger Cruzen is a freelance writer and public relations consultant based in Minneapolis, Minn.