by Ron Phipps, 2012 Immediate Past President, NAR
So if you are like me, you have been working in real estate for a long time. You think you have seen it all. Your body of work includes lots of transactions, and some amazing human stories, both happy and sad. In real estate we deal with the full range of life experiences.
Our collective experience right now of getting to closing is an obstacle course. Doesn’t it feel like the stars are conspiring to knock your transaction off track? Just closed one that ended up with 4 appraisals and weeks of heartache before we got to closing.
So what is happening behind the Wizard of Mortgage Oz’s curtain? Am I the only one who struggles to get my buyer to the closing table? The answer is absolutely not.
What we do know is that we have over corrected from the free-flow capital, no underwriting standards of 2004-2006. I repeat…over corrected. Prior to 2004, the average credit score for Fannie Mae and Freddie Mac mortgage was 720; today it is 760. This means that 15 percent of potential buyers cannot qualify.
In the past, pre-approval letters actually meant something. Now, they are a single yellow brick on the road to homeownership. The sad part is that they do not have a lot of value.
So what is going on? The problem is that the market for mortgage backed securities is very limited. The federal government continues to buy or insure most of them, upwards of 9 out of every 10 mortgages. In other words, the government provides the capital to keep the mortgage market, and, in turn, the real estate market alive.
As a result, the mortgage package needs to be perfect and complete. Three years of tax returns and back statements are not enough. Explanations of all deposits and expenses over $1,000 are now required.
You know all of the new requirements. You also know the reality of conditional commitments. Is the lender really committing to the buyer if the ‘commitment letter’ really isn’t a letter of intent? What does that mean for a seller? What does that mean for you? How can a commitment be rescinded two days before closing?
What you need to know is that strict underwriting standards are being applied precisely and aggressively. Some investors will penalize the origination loan company $30,000 if a mortgage defaults in the first year. Yes, that will make the processor obsessive.
We have not even talked about the appraisal process. In general you need direct, like kind sales within six months and within a few miles of the subject. If not, it will be a problem. What is also true is that the “appraisal review” is where the real problems occur. Someone in the process looks at the appraiser’s work as something to just pick apart.
All of this is part of the process of compliance…to make sure the package is “perfect and complete.”
When Dorothy was lost in the Land of Oz and wanted to get back home, she just clicked her heels three times. I wish it were that easy for REALTORS® and consumers to get back to a place where closings would make it to the table.
In the meantime, what can we as REALTORS® do? Here are a few recommendations:
1. Understand the process, particularly underwriting criteria.
2. Educate the buyers (and sellers) to process and requirements.
3. Be realistic in timelines.
4. Manage buyer and seller expectations.
5. Help buyers identify the lenders that are most likely to provide them the loan.
6. Be proactive in real time with the process.
7. Be active in NAR with Calls to Action and RPAC to improve the situation.
We will get through this…sooner rather than later. See you at closing.