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.
ABOUT THE AUTHOR Kris Berg is Co-Owner and Designated Broker of San Diego Castles Realty. If not-so static web sites are your thing, go here at once where you will find loads of real estate information including homes for sale, market trends, floor plans and more. Kris's hobbies include fencing and spot welding. She likes kittens. 
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We’re actors in a remake of Back To The Future Kris. Although I believe this will settle down to something like what we’ve had, because as my top mentor once told me – “Jeff, lenders lend, and it will be forever so.”
Until we get from here to there, we will be truly living in a time capsule.
It’ll be interesting to see just what real affect this has on the markets, especially the SD real estate market.
Great take.
Great Post! Reading about the sub prime from the eyes of Wall Street and seeing the effects first hand while in the trenches are two different things. BoA is huge and has a good lender view of what is going on they also have been putting into play counter measures like other big lenders.
Lenders may lend, but they will lend on THEIR terms.
Countrywide, for example, no longer offers 100% financing and I have seen reports that 19% of their servicing portfolio is delinquent (not just subprime loans).
That sounds incredible to me, but if true, is shocking.
I had my first blown appraisal of the past 20 years last week because the comps simply didn’t substantiate what my buyer had offered.
The homeowners who bought over the past few years, and the Realtors who entered real estate in the past five years have never seen a down market.
The current scenario reminds me of the S&L crisis in the 1980s when it didn’t matter how qualified you were, lending standards became so stringent that it was nearly impossible (or not worth doing) to finance a property.
As you noted, Kris, when a seller can’t sell, they can’t buy their next home and that creates a cascading downward spiral.
The big unknown in all of this is how many foreclosures and REO properties we are going to be dealing with going forward.
If we have a glut of foreclosures, combined with negative press, that B of A report may turn out to be optimistic.
The stock market is reacting today to the latest new home sales declines, as well as the woes of the subprime lending industry and it is apparent that lending standards are going to tighten substantially.
I fully expect Congress to hold hearings on lending practices and the lenders will cover their behinds by tightening lending policies.
From where I sit, it still looks like most sellers are in denial and think everything is going to be just fine “next Spring” (now).
Call me negative, but I don’t think so.
I think we have a long ways to go to reach stability, and may never again see the kind of market we had with the flood of liquidity in the financial markets of the past few years.
The simple fact is that the Fed pumped real estate with cheap money in order to bail out the economy after the 2000 stock market collapse, and 9-11.
Things have changed.
Even if the Fed tries to reflate the economy and avoid a recession by lowering rates, we have too much inventory and skittish buyers awaiting a bottom before they will buy.
In Boise, we are seeing very selective buyers cherry-picking the properly-priced homes that are in top showing condition.
Everything else is languishing.
I think the smart buyers are cutting good deals and will be very glad they bought in Boise in 10 years.
I am very thankful I am in Boise and no longer in California.
We should weather this better here due to our lack of national homebuilders, affordability, and high quality of lfe.
Phil,
Not to oversimplify, but it all goes back to supply and demand. Demand has had an amazing run in SoCal (and many other areas) for almost 10 years. Prices finally got out of whack and are undestandably adjusting now. It may take a while to reach equilibrium again. But if you note the new home sales out yesterday, the West was up almost 27%, with all other areas of the country down. Now this doesn’t mean I think the “flushing” is over out here because it’s not. But there is some resilience showing.
You’re right about individual markets. Where there is an abundance of developable land and the presence of numerous national builders, the adjustment cycle will take longer. But I don’t think this is comparable to the S&L deal in the early ’90’s. That was in tandem with a national recession, which we do not currently have (at least not yet). Interest rates were also much higher (i.e., around 9-10%). In San Diego we lost over 75,000 jobs in 24 months. Not the same as what we are seeing now.
Lenders should tighten their lending policies. It has been ridiculous and now they and many others (buyers, sellers and agents) are all paying the price. But this will cool down a market that got ahead of itself. It may take the rest of this year or maybe even next year to sort out, but for the long run, it had to happen. People still need and want to buy and sell. They just need to be more careful. And those who shouldn’t qualify for a loan won’t. For the long run, a very needed and belated adjustment IMHO.
Couldn’t agree more.
We have a party for five years and now we have the requisite hangover.
We will all live through it.
Great post. As an Austin-based mortgage company (www.mylendingplace.com) it’s refreshing to read a good, accurate post.