Unsold homes in today's market are often attributed to the lack of financing available to potential buyers. A restructuring of the loan system would not only be beneficial to buyers and sellers, but to the economy as a whole. If the government can bail out those who were default on their debt, shouldn't the government go to bat for those of us who have always been responsible with their bank books.
Why hasn’t your property sold? Let’s assume,
first of all, that you are working with a professional Realtor and that you have listed your property at a reasonable price based on the sales of similar properties that have sold in your neighborhood in the last six months. Let’s further assume that you have spruced up and staged your home so that it shows like a model home in a new subdivision. (That means discarding, or at least putting out of view, your 10 year collection of magazines and making sure that the beds are made and the dishes are done every morning before you leave for work.)
But your property is STILL not sold. “What is the problem?” you ask. The answer lies in the state of the credit market. The so-called “housing crisis” started about two years ago with a meltdown in the credit markets. This meltdown was fueled by loose lending practices that encouraged (actually forced) lenders to make loans to people with bad credit. By now, you have heard the term, “subprime”, on the nightly news for about two years and should understand that this term refers to people with the nasty habit of borrowing money and not paying it back as they promised they would do. The defaults on these shaky loans contributed to the failure of such venerable Wall Street firms as Lehman Brothers and Bear Stearns.
Credit was so easy to acquire a couple of years ago that so long as you could fog a mirror, you could get a mortgage. Unfortunately, some borrowers who had been great renters turned out to be terrible home owners. In response to rising defaults, the pendulum has swung hard in the opposite direction. If you have subprime credit, you will definitely not be buying a house until you can improve your credit history. But now even buyers with great credit are finding that it is very difficult to qualify for a loan. During the presidential campaign, we heard a lot about how Wall Street is the enemy of Main Street. But the reality is that without a solid and innovative Wall Street, we are limited as to the array of programs we lenders can offer to potential home buyers on Main Street.
Today, the majority of loans that are being closed are what I refer to as “your grandfather’s Oldsmobile loans”-- standard, non-jumbo, 30 year fixed amortizing loans. In order to qualify, buyers need to have a credit score of at least 620 and be able to document their income and liquid assets. The loan amount cannot exceed $417,000 or it will be considered a jumbo and will not be eligible for purchase by Fannie Mae.
One look at the local real estate magazines will quickly tell you that buyers are going to need bigger loans than that for most of the homes on the market, especially if the property is on or in view of the water. Although jumbo loans are available, the terms are not attracting buyers to the closing table. Buyers who need jumbo loans today are required to bring bigger down payments to the table than in the past. With the stock market in decline over the past months, many buyers no longer have the liquid assets necessary to invest in higher down payments required to buy real estate.
While some of the investment vehicles developed on Wall Street a few years ago built a house of cards by getting too far from the actual value of the underlying asset, what we need now is for banks and Wall Street investment firms to start opening their wallets, recently stuffed with bailout money, and start making loans to good buyers. The recent earnings reports indicate that the big banks and financial firms are racking up record profits, but they are not taking any lending risks. If I were back on Wall Street where I started my career, I would be putting together an investment syndicate of firms willing to lend money to buyers with good credit but who need a less conventional loan program.
For example, we need to have programs to meet the needs of self-employed borrowers with good credit histories. If the underwriting guidelines require good credit and proof of liquid assets, the risks to the lender would be limited. The rate for such programs would naturally be slightly higher than fully-documented loans, but that would be fair compensation to the lender for the increased risk. Further, interest-only loans are not inherently evil. They just need to be utilized by honest lenders who have consulted with their clients and explained how they work. In the right situation, they are an excellent tool. But just like with medicines, no one prescription is the right answer for every client.
We need investors who are willing to lend on properties that Fannie Mae has decided are “non-warrantable” and therefore ineligible for purchase in the secondary market. For example, there are entire condominium complexes on Hilton Head and Fripp Island that will not be sold to anyone who needs a mortgage until alternatives to the “grandfather’s mortgage” become available again. If the condo is too small, if the covenants allow short-term rentals or if there is no fidelity bond in place, buyers will not be able to get a conforming loan. Even if they have great credit and a salaried job, the deal will be rejected because the property, not the borrower, does not meet Fannie guidelines.
If your property is at the entry level price point, then financing should be more readily available to buyers. Since the purchase must be closed by the end of November to qualify for the $8000 tax credit offered by the federal government Realtors should stress a sense of urgency for a first-time home buyer to make an offer as soon as possible.
The financing issue is at the root of the slowdown in the sale of local real estate. Not only is it difficult for buyers to get financing, but consider that a buyer of real estate here probably needs to sell his current home elsewhere and the prospective buyer of that property cannot get financing either. Until the gears of credit start moving freely again, we will not see real estate sales increase.
So what can you do to fix this situation? Talk about it to everyone you know, especially your elected representatives. Lending by banks and other institutions continues to drop while they use taxpayer bailout funds to shore up their financial situations rather than freeing up credit to stimulate the economy. The Administration and Congress continue to allow them to get away with this. Our US senators and congressmen need to hear from us on a regular basis about turning the spigot of credit back on to stimulate the housing market.
It is impossible to overestimate how the healthy flow of real estate sales stimulates the economy. Our economy depends on businesses like landscaping companies, builders, home improvement stores, decorators, and appliance dealers. These are the small businesses that create jobs and build wealth in our community.
The recent economic reports indicate that the inventory of unsold homes is going down and new sales are picking up slightly. In order for this “green shoot” to grow into a real economic recovery, we must insist that the financial firms show some risk tolerance and creativity and start lending to borrowers with good credit that need something more innovative than a conforming fixed rate mortgage.
