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
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.”
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
Roger Cruzen is a freelance writer and public relations consultant based in