What the mortgage meltdown means to you
Originally appeared in Hills Publications, Aug. 24, 2007 and ANG Newspapers, Sept. 30, 2007
The sub-prime loan mess has created a problem with all mortgages. Lending issues, in conjunction with an already slowing real estate market, have serious implications for you as a buyer or seller.
Rising rates, tougher qualifications
Most purchasers require a loan in order to buy a home. The mortgage crisis has caused a rise in interest rates, especially those above $417,000 (known as “jumbo loans”), and lending conditions are increasingly stringent. Almost every day, I hear of sales that fell out of escrow because the buyer could not qualify under the new requirements.
More and more, sellers of houses that would have sold quickly in the recent past are wondering why their place has not even had an offer. One of the possibilities might be that buyers who previously could have purchased with less than 20 percent down can either no longer get a loan or can get one only at unacceptable interest rates.
In our area, jumbo loans are essential in a majority of sales because buyers commonly need to borrow more than $417,000. For example, with 20 percent down on a $650,000, starter residence, the buyer would need a down payment of $130,000. Add to that a probable $15,000 to $20,000 in closing costs plus a lender stipulation to have a two to six month cash cushion for mortgage payments.
This is a lot of liquid assets for a relatively modest property. Naturally, at higher prices the cash necessary increases commensurately. A large number of buyers have high enough earnings, but often not sufficient liquid assets to purchase and put down 20 percent. Even for those buyers with adequate cash, how many are willing to pay rates approaching eight percent when they were about six and one-half percent a short time ago?
Pre-approval letters
In previous articles I have described many pre-approval letters as “faux approval letters” because, contrary to popular belief, they do not guarantee the buyer will get a loan. An aftereffect of the mortgage fiasco is greater reliance on the validity of these letters.
One Bay Area real estate firm has advised its agents to make sure the letter is from the provider of funds, not simply the mortgage broker.
Appraisals may not be automatic
As lenders have become more conservative and risk-averse, appraisers are under pressure to make sure prices are not inflated. When the number of buyers is significantly greater than homes for sale, prices quickly escalate.
Today, however, our market is in the process of marching in the other direction. Even without the mortgage debacle, appraisers would have been cautious due to the changed market. Current conditions make them all the more circumspect.
A likely scenario is one where the house is selling for the highest price in the neighborhood and other, nearby comparables are listed and selling for less. In this situation, it would not be surprising if the appraisal came in lower than the accepted offer.
If so, there are a number of ways this could be handled: the seller could lower his price to the appraised amount; the price could remain the same and the buyer could increase his down payment; a combination of the two above; or, finally, the seller could carry the difference for the buyer for at least five years. Despite the possible solutions, in the absence of compromise, it could be another failed transaction.
Condition becomes more important
Lender caution and lessening competition will inevitably lead to increased loan issues for homes that have serious structural deficiencies involving foundation, drainage, sewer line, roof, and/or pest control. The longer a property is on the market, the greater the possibility of a buyer asking the seller to pay, either totally or in part, for elimination of the defect.
Many homes in the area are older and tend to have concerns that pop up during escrow, either unknown or overlooked by the seller. “As Is” sales, so common locally since 1997, could become more difficult. Major, heavy duty fixers might be harder to finance because of heightened vigilance by lenders.
Appraisers may be more attentive to condition and note the problem in their appraisal. At that point, most lenders will require the work to be done before close of escrow or, alternatively, will insist that funds be held in escrow until the repairs have been completed. Unfortunately, that may derail many As Is sales.
Do not count on lower rates
Even if interest rates decrease for a short time, an unsure prospect at best, it is unrealistic to expect the return of a seller’s market. As mentioned, high prices and increased qualifying hurdles for buyers are two big deterrents to another boom market. Many variables dictate a continuation of our softening market.
Final Thoughts
Notwithstanding some instability in the mortgage process, buyers are having less trouble than sellers accommodating to the changed market. For buyers, this means more options.
Sellers, conversely, find it difficult to accept that a neighbor’s house, which was not as nice, or as large, or in as good condition as their own, sold for more than they can now get for theirs. This is an example of “timing is everything.”
In today’s challenging environment, the most important thing you can do as a seller is proper pricing. Factoring the lending situation into a marketing plan with your Realtor will allow you a quicker sale at a higher price.
Related Articles:
Pre-approval Letters: Can You Count on Them?