Wednesday, June 11, 2008 at 07:22AM
Tighter Underwriting
Mark in SD posted this link on BMIT about the credit crunch, and how banks are tightening their underwriting guidelines across the board - from mortgages to credit cards:
http://www.mcclatchydc.com/227/story/40246.html
This house is a good example - it's on Ditmar in South Oceanside in an area that we call 'Baja Carlsbad' because of it's proximity to downtown Carlsbad about a mile away. It is a typical 1950s-style bungalow that has been expanded and remodeled over the years. Most thought it was tastefully redone, and a cool house, but hard to justify the price due to the lack of sales lately. There haven't been many closings in South Oceanside this year in any price range.
I had it listed for $699,000 in February, and though everybody who saw it, loved it, we only had one offer that was contingent on their previous house selling, and that ended up falling through.
Around the 1st of May an agent submitted an offer for $650,000, and said it was all his buyers were going to pay. With the lack of comps available, and the need for the out-of-country sellers to close this deal, it sounded like a reasonable proposition.
But the sellers were tight on equity - their loan was $620,000+.
Somebody had to budge. But the sellers didn't have the dough, the buyers wouldn't come up on price, and the buyer's agent wouldn't move off his 3% commission that was offered in the MLS. Do I do something, or let it crash and burn?
I stepped out of the deal. What use is it to let the deal fall apart? We had tested the market for three months, and it was clear no other buyers were going to come along and pay more, so I was going to end up with nothing either way. I might as well get out of the way and let the deal happen, and maybe down the road something good will happen out of it. I could have carried a note for the commission, but I'm not a collector - if the sellers can send me a check someday, great, or get the other agent to throw a referral fee my way, terrific.
I sent over all of the signed disclosures too, so the buyer's agent had a pretty easy road to the finish line, if he could get an appraisal to come in right.
But the rest of the story shows how tight/nervous/conservative lenders are getting.
The appraisal comes in at $615,000, a fairly significant $35,000 short of the purchase price. The buyers planned for a 20% down payment, but thankfully they had some extra dough, so they agreed to bring in the difference in cash. So now it's up to a little over 25% down payment.
They sign loan docs, and the lender funded the loan - which means they wired the money to the title company.
But then the underwriter double-clutches, and decides that they need AN ADDITIONAL 5% down payment, bringing it to over 30% down. They insist that the first funding gets wired back to them, and the buyers bring in another $32,500, sign docs again, and it finally closed last week.
For those of you who are contemplating waiting until next year to sell - re-examine what you are up against. If you are in an area where prices could miraculously hold up, consider that the lenders are nervous, and their additional demands will further shrink the buyer pool - not many buyers would have done, or could have done, what these buyers did.
If you're selling, get 'er done! In fact, if you think you might wait until next year, even if it means having to take a little less, you might as well lower your price today and get it over with!
(I heard this story from the other agent, who did say he's going to send me a check)
Jim the Realtor
in Thinking of Selling?
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Reader Comments (18)
Check this out...
The WSJ reports that some savvy homeowners are buying new homes in the same neighborhood that are far cheaper, and then walking away from their old homes and letting them fall into foreclosure.
We've already seen 'You Walk Away', how much longer before we see a company called 'Buy One, Then Walk Away"?
Buy and Bail is the new term. Sad.
Link to WSJ article 'buy and bail'
Jim added this quote from article:
"Meanwhile, Mr. Hawks, the Las Vegas broker, says he receives one to two dozen inquiries every week from individuals inquiring about a buy-and-bail. 'People are starting to ask how much their good credit is worth, particularly when their home is underwater by hundreds of thousands of dollars.'"
commentary on Calculated Risk:
link to CR coverage
The buy & bail is classic hyperbole. Sensationalist journalism meant to cause outrage and increase readership.
The hyped-up perception that everyone who bought a home between 2003 and 2006 were criminals needs to end.
I'm curious how much home ownership went up during the last 5 years. Though it will now clearly decline.
There are some very savvy people who enter their thoughts on this blog. I highly doubt any would consider the buy and bail approach anything less than insanity and perhaps only briefly viable for a few desperate few.
Mozart - I work in a white collar environment and I have heard of several people who have done this or plan to do it. It's enticing because the banks are so slow at foreclosing that people know that as soon as they buy their new house they can move into it, put renters in their old underwater property, stop making payments on it, and all of that rent money goes in their pockets until the eviction notice comes. This may be 8-9 mos after leaving the old property - easily $15K on top of having a much smaller mortgage and probably a better house. All in exchange for 5-7 years of bad credit. Not that I agree with it, but I don't think that the WSJ article is just hype.
It is absolutely not hype. I also know several people who are doing this. Which of course means that even as sales have showed increases over the last few months future inventory is increasing faster. How much longer until Fannie Mae losses are so large foreigners will no longers invest in those bonds? When that happnes you might start to see real steep price declines?
If lending is tight how does one come up with the doe to buy a 2nd home? If your house is under water that would mean you're already making high payments. Wouldn't lenders see that and know what you're up to?
Homeownership Rates:
Link to Homeownership Rate chart
IMHO, the lenders get what they deserve. Proper underwriting could have prevented this mess in the first place. If lenders are allowing people to get new loans without carefully checking out their current obligations, they have nobody to blame but themselves if, later on, it happens to them.
Homeownership NEVER made people more responsible or better neighbors. It used to be that only responsible people (saved money, stable & well-paying jobs, low debt-to-income ratios, etc.) could qualify for mortgages, so only responsible people could be homeowners (with a few exceptions).
This entire experiment -- shoving home *owership* on the masses -- is an utter failure. Amazing that all the financial "experts" couldn't see this coming.
I think in the past the *desire* to be a homeowner motivated people to become responsible savers. The process of saving for the down payment and building the financial history to qualify for a mortgage was an educating and maturing experience. Making it "easier" to get in the door changed that.
Mozart,
It's there, out in the open. Check out where the soon to be former owners of 5322 Willow Walk Way currently are. They're not living in Willow Walk Way for more than a year... and the agent has been open about them *ahem* moving to another place in Oceanside after their timely *equity withdrawal*.
It's there, it happens... a lot.
Chuck Ponzi
The Buy and Bail are early. With price falling another 25% over the next three years. They should wait. There is no rush if they can make the original payments.
This Buy and Bail was used a lot in Houston during the eighties after the oil crisis.
I have been telling people about Buy and Bail since last year. But you need the original loan on the first house. If you refinance, the lender can go after you for the deficit.
With every glitch I kept thinking... whew another opportunity for the buyers to get out of this deal BUT they persevered.
Honestly, in this market, I am amazed that the house sold for $650,000 - no matter how close it is to Carlsbad. It looks like a cute little house but really, $650,000?
I cannot believe anybody would bring additional cash to close a deal over what the bank appraised the property at. I have a feeling they might live to regret that decision, but what do I know.
Regarding NC's comment about putting a renter in the first house and not paying the mortgage thus pocketing the money. Hypothetically, do you think this could be done to my advantage?
That is I agree to rent the house (that is worth less than the last purchase price) from the owner figuring he will not be paying his mortgage; while I plan to buy it at the foreclosure auction at a discount (or if he can swing a short sale for me) a year from now.
What do I get out of it? I get the owner to "let" me have the house for the significant discount I think I should have, I get to live in the house now rather than waiting a year before the owner capitulates and sells it at the discount I want.
What does the owner get? He gets my cash for the 9-12 months before his loan is foreclosed. Presumably this allows him to get a good portion of his down payment back out of the house. Note that he is already living in his new house; so any hit to his credit would be minimal.
Where is the risk to me? someone bids higher at the auction, the owner doesn't help me in the end by going to bat for me at the short sale discussion with his lender, some one offers full price when he "tries" to sell it a year from now. Am I an accessory to fraud if I tell this hypothetical story to the owner as he agrees to rent me the house?
I'm not a lawyer, but I would think that as long as neither you nor the owner ever discuss the possibility of the owner deliberately not making payments in order to cause a foreclosure there would be nothing illegal happening. People make offers because they "figure" that someone is on the road to foreclosure or bankruptcy all the time.
My neighbors "bought and bailed." Their home went NOD almost 90 days to the day that the moved out and into a home across town. I don't think it's as common as some believe, but it's happening here and there.
The salient fact is that the agent refused to lower his cut. Shame on you guys. I gave seminars 4-5 years ago advising that AT LEAST 1 in 3 (or more) agents would be out of a job in a few years. I was eventually not invited to the seminars. What a shame. Greed kills a business. You guys deserve what is heppening. You can make a deal by negotiating EVERYTHING or you can watch it slip through your greasy fingers. I'm waiting for my greedy RE agents/mtg. brokers to ask me if I want to supersize my order. . .