RELUCTANTLY RETURNING TO THE MORTGAGE MESS. IT'S STILL THERE LOOMING.

ARE WE STILL IN 2004?  THE MORE THINGS CHANGE, THE MORE THEY REMAIN THE SAME. 

                              * * * *   HARD CORE REAL ESTATE TALK   * * * *

Monday morning, I spoke with a prospective home buyer who is interested in buying a home in the $450,000 to $500,000 price range in my market area. I looked at the homes he selected to tour and then asked him, "How did you determine your price range?  Have you spoken with a mortgage company??   I usually ask a buyer if they've been qualified because, if they haven't, I have my handy calculator and can "do the numbers" quickly. "Yes, I have been pre-approved for $475,000", he said.

I'm relieved when the buyer tells me that they have been "pre-approved" because it means that a lender has pulled a credit report.  Even when, as is this case, the "pre-approval" is really only a "pre-qualification", it's helpful.  As it turns out, the buyer's income is $67,000 which sent up a "red flag" in my mind about his ability to buy in this price range.  The lender used monthly real estate tax and hazard insurance estimates that are only about half of actual costs.  Since the loan officer is not local, he is guessing and the buyer has no knowledge of these costs.  Is this an argument for using a local mortgage company?  I'm not saying that, but I've seen too many Good Faith Estimates from Internet lenders that underestimate costs.   

HOW DID THIS CONSUMER DETERMINE HIS PRICE RANGE???  He did what so many hopeful home buyers do.  He looked at the homes for sale on the "Search Listings" page on my web site.  Home buyers don't always start with what they are qualified to buy.  A home buyers will often begin their search with what they want in a home.  This gentleman simply searched for homes with 4 bedrooms or more, 2 full baths or more and a finished basement, and nothing built before 2000.  At that point, I was just glad he wasn't looking for acreage too, although he mentioned a large yard.  He had searched for "Frederick County real estate" and "Frederick County homes for sale".  My web sites have #1 position for these search terms.  Fortunately, he called and I answered the phone.  I love speaking with home buyers.  Home buyers are very responsive to agents who will take the time to help.  I spent over an hour on the phone with this buyer.  That's my job. 

DON'T ASSUME THAT THE CONSUMER UNDERSTANDS HOME FINANCING.  This is a gentleman with a family who wishes to move from his crowded apartment and buy a home to suit his family needs.  He has no conception of qualifying income.  This gentleman believes that he can manage a mortgage payment of $2,000 a year because that is what he is paying for rent.  He has savings of about $10,000.  This is not an unusual scenario.  Families who are living in an apartment can often manage to save if they are frugal.  In a rental, the consumer has the monthly expenses for rent and utilities.  However, they are not putting money into home repairs, real estate taxes and hazard insurance, both of which have escalated dramatically in the past 2 years.  He will also incur significant transportation costs in the new location.  Gasoline and even the train are very costly today.  Closing costs in the county of his search, even without lender fees or points would be about $10,000 - $12,000 depending on the real estate tax pre-paids.  His wife will not be going into the job market for at least 5 years, so their planning must be with his income only.  No doubt we can negotiate some closing cost credit with the seller in this market, but our buyers are going to be limited by the type of loan they have. 

AM I LIVING IN A TIME WARP?  Are we back to 2004 when the buyers were taking interest only loans to qualify, knowing that they would be refinancing in a year or so?  Could be.  This buyer would qualify for an interest only loan and could keep his payments down to his comfort level.  However, he cannot, in this market rely on appreciation to make refinancing possible.  The difference between 2004 and 2008 is market value.  In 2004, homes in the area of this buyer's search were appreciating at about 1.3% a month.  As of now, homes in the area of search are down almost 2% for the past year.  Sales volume is down 40%.  Homes are selling at about 91% of list price.  What are his chances of refinancing before his loan begins to reset?  With his family, his income isn't high enough for the mortgage interest deduction to be sufficient incentive to go into debt for $450,000.  I'm not comfortable selling a home to a buyer that I know he won't qualify for when the loan resets.

WHO HAS THE RESPONSIBILITY TO QUALIFY THE BUYER??  We have already established that the consumer are the victims.  The government have determined that the public are victims and have come to the rescue of about 150,000 borrowers whose loans are resetting to payments that the home owner can't make.  I suspect, as with all government programs, that the Devil is going to be in the details.  Some of the details that I've read about appear to eliminate a large number of consumers who are going to default this year because their loans are resetting and they will not be able to make the payments, however, because they don't fit into the narrow window of opportunity the government opened, they will not qualify for the interest rate freeze. 

IF THE CONSUMERS ARE THE VICTIMS??  The question is, victims of whom???  In the end, it is the loan officer who takes the loan application, runs the ratios, looks at the loan instruments available.  It doesn't stop there, though.  That loan officer has got to sell that loan to someone who is willing to put money   

What ever happened to qualifying ratios????    Am I so old fashioned that, when I qualify a buyer, I use some limit of qualifying ratios????   I suppose so.  I was blasted once for mentioning qualifying ratios by an Active Rain member loan officer who commented that I wasn't qualified to look at ratios and loan types because I don't know of the 31 types of loans that he offers.  Mmmmmmm.    O.K.  I'll accept my lack of qualification to qualify a buyer if the loan officer will accept the responsibility for knowingly putting a buyer in a loan they can't make payments on in a year or two????  The Good Faith Estimate from the loan officer that "pre-approved" this buyer clearly underestimated the costs taxes and insurance in the mortgage payment and didn't account for MI or MIP anywhere. 

THIS WAS A PLAN DESIGNED TO FAIL.  Seems to me that this typifies one of the problems that have gotten the mortgage industry into the present quagmire .  They have a loan for every buyer, even the buyers that don't qualify for anything.  This isn't rocket science.  Qualifying this buyer to squeeze him into a home out of his price range is simply bad business and worse public policy. 

What to do for the buyer who wants to buy a home for which he is marginally qualified today and will not likely be able to make the payments next year?  I've gone through the financial scenarios with him including taxes and insurance and he has agreed to look at older homes in a lower price range.  Who knows?  He could even get some acreage.

Fact is, most consumers are going to buy a home for their family.  Seems to me that the consumer is better served to buy a home that won't put his family at financial risk.   If loan officers are going to qualify buyers, they have a responsibility to present a realistic picture to the consumer. 

Courtesy, Lenn Harley, Broker Homefinders.com, Lenn Harley, 800-711-7988, E-Mail