Shifting Lending Tides – Who Cares?

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You do, or at least you should. Whether you find yourself on the buying or selling end, the issues facing the mortgage lending market will certainly have an effect. Just how much of an effect stricter lending policies will have on the real estate market remains to be seen.

Inman News reported yesterday on a report issued by Banc of America Securities (BAS) on the potential short-term repercussions of tighter lending standards.

Problems in mortgage lending go “well beyond subprime“, and the tightening of loan underwriting standards now underway is likely to push demand for homes down 15 percent and depress prices by 5 percent this year”.

Blah, blah, blah, you say. But the BAS report goes on to caution that the problem will be most acute in Nevada, Florida and California. Hold on a minute! We’re in California! Now it’s getting personal.

The Golden State, we know, is a high-cost housing market, and we have enjoyed a tremendous appreciation in home prices over the past decade. This is all just ducky if you are a seller, except your buyer pool is diminishing. Your buyers have been priced out of home ownership in increasing numbers, and BAS points out that more buyers in our state are dependent on little or no-down financing options. These no-ante plays are becoming more difficult to sell to the underwriters.

Just yesterday, a San Diego loan officer from First Capital Mortgage cautioned us that the days of 100%, no-doc (stated income) lending for buyers with lower credit ratings (FICO scores below the mid-600’s) are swiftly coming to a close. For the time being, at least, 100% financing options are still available for consumers with better credit, but …

The report may even be underestimating the impacts of the tightening of credit under way, because it assumed lenders would still be willing to fund mortages with 98 percent or higher loan-to-value ratio for borrowers with credit. If all lenders stopped making zero- or near-zero-down loans altogether that could cut demand for housing by 22 percent.

That’s the science; now, here is the art-interpretation. Steve and I are representing sellers on several lower price-point properties right now. One, a small condominium listed in the low $300,000’s (this is San Diego, after all) has had three offers to date, all of them involving 100% financing plus seller-paid closing costs. This is the market for our particular condominium, and with an elimination of no-down financing by lenders would come an elimination of potential buyers for this home. It could represent one of the best real estate opportunities since the Louisiana Purchase, but no buyers means no sale. No sale means the move-up buyer (our client) won’t be moving up, and so on and so on. It is the trickle-up theory of real estate.

Much like condo-conversions in our market had a significant impact, so may the shifting tides of mortgage lending. The sky is not falling, but sellers would be wise to understand the dynamics currently at play. Just yesterday, we were generally complacent in the knowledge that anyone could get a loan for anything. The sloppy”pre-qualification” letter which has historically accompanied the offers we see (the product of a phone conversation in which the lender asks what you make, what you owe, and then responds “sounds good to me”) no longer gives sufficient comfort that the buyer can perform. Today’s buyer-qualification vetting process needs to be more thorough. And, if you are a would-be buyer with less than stellar credit or little cash, you may be feeling squeezed.

You should care.

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