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 How can a commitment be rescinded two days before closing?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.
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:
by Ron Phipps, 2012 Immediate Past President, NAR
Give me your tired, your poor,
Your huddled masses, yearning to breathe free,
The wretched refuse of your teeming shore,
Send these, the homeless, tempest-tost to me,
I lift my lamp beside the golden door.
You may recognize this inscription from the Statue of Liberty. Since 1886, “Liberty Enlightening the World” has stood witness facing southeast toward the Atlantic Ocean. The statue has welcomed visitors and new citizens.
She has spoken loudly in silence.
She has flown without wings.
She has inspired without voice.
She has troubled our conscious without hesitation.
She has endured without complaint.
The Statue of Liberty is the symbol of our freedom and our Republic… Life, Liberty and the Pursuit of Happiness.
What many people do not know is that there are broken chains at her feet. They are not visible from the ground level. They represent the chains of oppression and tyranny. They represent chains of the past. They represent the denial of rights: of life, of liberty, and of property. That is buying, owning, and selling property.
Lady Liberty is also one of our most notable images of persistence and perseverance. Just as our freedom was WON, it must also be protected and defended. We do that. But, she is a witness to an important life lesson. She and her loyal American believers can endure the ravages of war, the challenges of economic strife, and the pestilence of political partisanship.
She stands tall and proud day and night, rain or sun. She reminds us that a nation of homeowners is unconquerable. She gives us appreciation not only for the ebb and flow of value, but also the importance of the foundation of homeownership, for us as individual families, and as a nation.
One additional observation about the broken chain at her feet: We need to remember the links of the past to make sure that we are masters of our future rather than enslaved by it.
The light of freedom is lit and the doorway to private property ownership is open.
By Ron Phipps, 2012 NAR Immediate Past President
E Pluribus Unum. Out of many, one.
For many years, this has been the motto of the United States. Today, it seems to be more important than ever. As a country, we need to come together in order to thrive in the next century, rather than simply survive. You hear a lot about the changing role of the United States in the world. While that is important, we need to come together to take care of families, whether home owners or renters, in this country.
As an organization, we need to do the same. Out of many we need to be one.
The Rally to Protect the American Dream, in Washington, D.C., on May 17, is a tangible example, a true witness to the agenda.
E Pluribus Unum. Fifteen thousand of our members will represent the 1,000,000 members who represent the 75,000,000 home owners and the 320 million Americans who need shelter.
Another way of looking at it is thousands of voices coming together for a single message, in a single voice — the voice for home ownership. Out of many, one.
It is also true that this country is “of the people, by the people, and for the people.” We as an organization are exactly that:
- We are OF our membership, leadership and REALTOR® on the street;
- We are participants in our industry and our country (BY the people);
- And we work FOR ourselves, our customers and clients, and our country.
We truly are OF the people, BY the people and FOR the people.
We are gathering in Washington, D.C., to personally and collectively deliver our message to our representatives and our government. They both need to be of, by, and for the citizens of this nation.
I am excited to be joining fellow REALTORS® in Washington D.C., to do my part for families across this country. E Pluribus Unum.
I just spent the last few days traveling for the Leadership Team out West, first to California’s Legislative meetings and then to the Resort and Second Homes Meeting at Lake Tahoe, Nevada. It was a special trip and very inspiring.
In each of my public presentations, one message was central: The future will be written, and we REALTORS® have a choice: We can be authors of our future, or the object of the future. In other words, we can engage and write our future or we can be spectators.
For the past several years, we have “involved” ourselves by providing solutions to the housing crisis. However, now, there is a new approach REALTORS® across the country are embracing: action and engagement.
Maybe it was wishful thinking (or blind optimism) that led us to believe that the market would self correct and mortgage money would be available to credit worthy consumers. After the bailout of the “Too Big to Fail” banks, REALTORS® assumed that these companies would step up and begin to provide the life blood to our market – mortgage money. We also assumed that the government would step in and solve the problems. I’m not sure why we believed that everyone else would step up and make it right, but we did. And, to be fair, steps were taken, but it has not been enough and it is not right.
The change for us to be more active is a good one. We are relying upon ourselves – our hands and our ingenuity – to figure out the solution AND take control, rather than allowing some else to resolve the problems.
Your NAR leadership team is working within this new understanding and focus. We are no longer stepping. We are marching and running.
Specifically, we are working to create channels of communication between REALTORS® and the big banks. Right now the five largest banks are responsible for 73 percent of all of the mortgages written in the United States. While that fact may be disturbing, particularly considering that 30 years ago the top five banks were responsible for 25 percent of mortgage lending, it does have value. We only need to communicate with those five to resolve many issues in the market.
We have decided we need to be authors of our relationship with these banks. It is easy to blame, but creative problem solving requires focus and discipline. These are skills, traits that REALTORS® know well. We are working to write and define the “new normal.”
Some people suggest that leadership should not tell you what we are attempting to do, but rather tell you after the success has happened. I disagree. By sharing our agenda, we make sure that we are representing you. It is also a way to make leadership accountable. Most importantly, sharing gives you the responsibility and the opportunity to work together to come up with effective solutions.
After all, who has a better vantage point than you, the neighborhood REALTOR®? So, please, share your thoughts and ideas with us.
This initiative is a reach. We are looking to redefine the flow and availability of mortgage money. But our industry cannot operate without it. We need to ensure that the global financial system has a steady, competitive, reliable, and available source of mortgage money.
The American Dream, when realized, is a great thing for American families. While re-thinking what people can afford is appropriate, re-thinking cannot be allowed to eliminate homeownership entirely from the national consciousness.
As authors of our future, we must insure that the American dream is the right size, but still very much a real part of the American experience. — Ron Phipps, 2010 NAR President-Elect
