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Distressed or Distraught: The Process of a Real Estate Transaction

by Ron Phipps, 2012 Immediate Past President, NAR

The Wizard of Oz and DorothySo 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  How can a commitment be rescinded two days before closing?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.

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 if feel like the stars are conspiring to knock your transaction off track?

Just closed one that ended up with 4 appraisals and weeks of heart ache 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 Freddy 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 is 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 with 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 place where closings would make it to the table.

In the meantime, what can we as REALTORS® do? Here are a few recommendations:

Comments
  1. Jacqueline Schmieder

    I really appreciated your article. Working in this market is a challenge and your information is very insightful. Right now we need all the helpful advise possible. Keep these great articles coming.

    Jacqueline Schmieder
    Rodeo Realty , Beverly Hills

  2. Kathleen Barnard, GRI

    It would be so helpful if Brokers would realize the value of mandatory training, and,
    following up w/classes held by the lenders who now are in control of transactions.
    Fanny & Freddie usually are helpful if we ask for classes, and prominent lenders, like Wells Fargo, BOA, etc. are willing to help if we ask. The old song “Training” is still
    the best and most effective.

  3. Kathleen Liggett

    When are we going to get lenders to “approve a buyer” ahead if putting them under contract. It just seems like the whole process is ***backwards. If we could have the buyer approved & just subject to appraisal it would save so many closings. I don’t understand why we as Realtors are still putting buyers in cars, showing property, getting their hopes up, having them spend money on home inspections and gambling that they are going to get their loan approved. If I could find a lender who would actually preapprove a buyer, they would get all my business and I would tell everyone I could about them. Wish someone could tell me how we can get lenders to listen to us.

  4. your lips to God’s ears; the same folks and practices contributing primarily to the economic debacle we’re in are making policies and procedures preventing us from getting out – how this can’t be criminal is beyond comprehension

  5. diann

    Thank you for your Voice/Blog, after returning to the Real Estate Market in the new rules -a needed review & update informative, see you at closing!

  6. Prasanna Mohan

    Can not NAR do something about getting the processors to give more value to the opinions of real estate agents in an appraisal? Some of the appraisers do extremely incompetent jobs and totally ignore the reasoning for higher values presented to them.

  7. Thanks, Ron, for your comments. Too many of us think preparation and knowledge are not important. Please keep up the good work!

  8. Susie Manikowski

    Wow, All good information. Now I understand why my lender was so concerned with the buyers attitude? He is concerned about the fine.
    I have several transactions going and everyone has been a major ordeal.

    The loan/appraisal process has become such an obstacle in getting a home sold.

    What can we do to turn this around?

    Susie

  9. Beth Tyler

    I was looking for more out of this article. Only restating the factual problems was not sightful. Saying to set realistic expectations is again restating the obvious; who isn’t trying to keep their sellers and buyers flexible?
    Giving ideas, ways, methods and/or dialogue to help set realistic expectations would have been helpful. Do you recommend post occupancy, etc?
    However the real problem is sellers often risk the enormous expense of moving out and procuring a new home, often out of state, without knowing their buyer can obtain a loan.

  10. Kim dixson

    You said it the key here is to direct your buyers to lenders who will close!
    Thanks for the article!

  11. Armandina Goetz

    When the public hears the raise in home sales, it looks to be all positive. They do not report the number of sales that fail to make it to closing because of the tactics underwriters are obligated to perform. The regulations change on a daily basis. The mortgage conditions are not being met til day of closing in many transactions. The attorneys and banks state that this is the new normal. Why are we letting this get so out of hand. The public wants to buy and are getting turned down. The interest rates are at an all time low and prices are too. There does need to be less red tape for the too big to fail banks. We take risk everyday in real estate by trying to improve the economy and do not get paid til we make it to the mysterious closing day. Do we get paid today, or do we make sure we have enough other sales to make it to another adventure of real estate?

  12. cgeorge

    Thanks for the words of encouragement. It is always helpful hearing that others may be going through the mortgage maze and getting stuck, sometimes I feel like I am all alone in this. I am a new realtor and am growing my business one client at a time, I got my license in November of 2010 and started selling in Feb of 2011 so far I have only had one really hard sale that was up in the air on whether or not it would get to the closing table, but believe me that one was the sale that made me stop and think….WHY?

  13. Lana

    Very good points! Unfortunately, I believe it will get worse before it gets better. There are more and more regulations every day. It was announced this week that all FHA loans will require the HUD1 minimum of two days prior to closing and if there is anything that must be changed, no matter how minor, it will then require another two days before closing and that is just the “tip of the iceberg”. Lenders will have to be really “on their toes” throughout the process and the other parties to the contract will have to have incredible patience!

  14. Is it really worth fighting FHA appraisals in your opinion? I don’t want to put good money after bad. Are you closing many Flips?
    You mentioned you just closed one with 4 appraisals…did the buyer pay for all of those?
    I just had a closing fail due to 2 FHA low appraisals. My biggest problem with appraisers is they don’t know this is the 3rd house my buyer bid on and has to up the price to compete with other buyers to win the contract on the house. Meanwhile they seem to be finding the lowest possible value for the house. Aren’t they just supposed to try to find the value a willing buyer and seller have agreed to. I argue too that they are using old comps. If it is a short sale that took 9 months to close, then that is not a current market comp. Thanks for your article.

  15. So TRUE! You are definitely not the only one. Great article!

  16. Diane Riffee

    My advice… DON’T USE WELLS FARGO!! My buyer, who hasn’t made it to the closing table yet has had to ‘source’ (my new most hated word) deposits over $100! It used to be deposits more than the borrower’s paycheck. He has had to re-send the same documents at least 1/2 dozen times! The same conditions, which we have fulfilled several times, keep showing up on a new list! And if I forward documents on his behalf… As a service to him… The processor says she can’t accept them! This is often inconvenient for him because he works long hours. So we are losing more time resending documents that have already been sent!!! It’s delay-after delay- after delay!! Now our short sale approval letter has expired! And we have to re-start the process with BoA! Insane… Simply Insane!!

  17. Helen Snyder

    In my 3.75 years in very rural Arizona real estate, with about mostly-cash 30 sales behind me, I have yet to close with any loan other than seller carryback. Our problems are lack of nearby comps, houses on large parcels of land (10-40 ac is not uncommon), and lack of uniformity in construction styles. Lenders stay away in droves.

  18. Louis

    Very well written…. I would like to add that all our lenders we broker to demand ALL deposits to be verified with a paper trail and if any deposit is cash, borrower is screwed. The pendulum has swung and it seems to be stuck in the “scrutinize the loan to death” position.

  19. Dan Jenkins

    I am a realtor and appraiser and read your commentary on the appraisal review process. I offer a suggestion that a realtor should be aware of the apppraisal review process and the options for the dispute process. Utilize lenders with staff review appraisers that will see such disputes. IntrAgency, GSE, and Dodd Frank all have criteria for appraisals being replaced when deemed materially deficient forca safexand sound lending decision. I work in this capacity for a lender and it does workls.will be happy to discuss and share the process.

  20. Thank you for your article –you have hit it on the head- most pre-quality letter are worthless. Mortgage People need to be concerned before they hit that button that sprews out a prequalify letter. I now write in detail what I expect of a pre-qual letter and I check to see if a credit report has been run on the buyer before I talk to my sellers.
    Also I am very careful now a days who I show homes to – no qual letter , no show !! Time is $$$ and YOU have to control your time accordingly.

  21. What if NAR fined a lender for missing a closing date or 2 days before closing the buyer isn’t approved after all…. Seems the lender is the only one with no accountability.
    Penny Moore
    Broker/owner
    HOME PROS REAL ESTATE GROUP

  22. We need a revision of the federal legislation that made underwriting too restrictive. Credit and income guidelines are too narrow.

    If one refinances a home and pays off credit cards with cash out, it should be possible to adjust credit scores for the payoff improvements.

    If one is self employed and shows a better average income over a longer time span, especially with business income that is subject to economic fluctuations that should, it should be possible to use the higher average.

    There should be more flexible arrangements with higher down payments, especially over 20% – 50% down payment.

    I believe that NAR has to object to the present underwriting requirements in order to improve the housing market.

  23. Thank you for this article. Being a newer agent, (14 months) and having recently had 4 fall throughs. I appreciate learning that it’s not uncommon for deals to fall apart, and that it is not necessarily my fault and there are steps to take for this to occur less often. It would be extremely helpful to continue to hear more about bullet proofing the sale.

  24. Dwayne R. Saunders

    Great article, thank you! Puts things in a nutshell, in proper perspective. Realistic, optimistic, and common sense pre-qualifying of our buyers will help make sure we meet at the closing table! Thanks again, Ron Phipps, and N.A.R.

    Dwayne R. Saunders
    ERA Yes! Real Estate &
    Yes! Mortgage
    Glendora, California
    (562) 213-7171 Cell
    Dwayne.Saunders@ERA.com

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