On Real Estate: Credit guidelines tighten, sales fall

By Jim Hagerty

Staff Writer

Seeing a glimmer of light in a long and dark tunnel was evident in August as Realtors saw an increase in sales as a reason to stay in the business. This month, the glimmer may turn to a mere flicker, as banks continue to keep the doorway to home financing well guarded. Even as first-time homebuyers qualify for the highly-touted $8,000 tax credit, deals are falling through.

When the federal government announced the tax credit, most industry pros began to breathe the relieving sigh necessary to justify remaining in an industry that had all but exploded at the seams.

With a carrot like $8,000 to purchase, first-timers would be the sector to save the day. Gone were the subprime clients that many loan officers did anything, including submitting bunk appraisals, false income docs and altered credit reports, to pass through underwriting. The result left lenders to climb a mountain of worthless mortgage securities. The big players stood only by the grace of federal bail-out funds.

When mortgage giants Fannie Mae and Freddie Mac went into conservatorship last year, the Treasury again came to the rescue. The Department of Housing and Urban Development (HUD) continued to knock boots with FHA, rolling out what many felt would help lenders increase portfolios of solid mortgages. However, foreclosures still skyrocketed. At the onset of the boom, and like the lenders that made their loans, subprime homeowners fell first. The rest proved to be a progression of financial woes for the U.S. economy. There was, suddenly, an overstock of existing homes. Investors with cash are still taking their share. Others, even armed with the tax credit, are left at the mercy of lenders.

Because FHA is not a be-all, end-all, conventional financing is now the only option for millions of potential buyers. When sub-prime exited, the collective cheer from the nation’s Realtors was a shot heard ’round the world. Gone, they thought, were days of deals blowing up at the closing table after months of over-promising. Think again.

Sub-prime is still gone. By the looks of things, it won’t be back anytime soon. The current problem, however, still lies with the now gun-shy banks. Most are turning the screws on credit guidelines, leaving prime buyers with down payments and their $8,000 tax credit in hand. Conventional financing is certainly not what it used to be.

The tiniest credit problem or glitch in any part of a deal can prompt an underwriter to chuck it faster than it came in the door. In turn, sale prices continue to fall. The second wave of foreclosures are now on the market, and predictions are not favorable for sellers, especially when buyers are either unable to connect on financing or simply afraid to pull the trigger. Even the well-armed are inching back to their rental units, many holding onto their jobs with clenched fists. Meanwhile, lenders continue to sniff out what they need most—cash, of which a good number of conventional borrowers have little. The number of qualified buyers just may out-strip the number of available homes—perhaps by design.

From the September 30 – October 6, 2009 issue

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