I think we all agree that the lack of regulation in the mortgage lending industry was a primary cause of the housing market collapse.  Not everyone with a pulse should qualify for a zero- down, $400,000 mortgage.  However, the new rules being proposed by the federal government could be the fatal blow to a struggling housing industry that is barely surviving on life-support.

The cornerstone of the proposal is the idea that the very best rates and terms for conventional loans would be reserved for the very best borrowers…..sounds somewhat reasonable, until you understand what an exclusive club that would be, and how difficult it would make buying for first-time or lower-income borrowers.

First, a 20% down payment would be required.  In some parts of the country, you can buy a nice home for $150,000, but even so that would mean a down payment of $30,000 – a big number for a lot of people.  But here inSan Diegowhere a nice 2 bedroom condo is going to cost you around $320,000, a buyer would need $64,000, which is most likely a staggering sum for anyone considering a condo purchase.

If you think that sounds a bit harsh, you’ll love the other suggested requirements for the so-called “Qualified Residential Mortgage” or QRM:

  • Strict debt-to-income ratios.  A max of 28% of gross monthly income could be used for housing expense and total monthly debt could not exceed 36%.  Currently, both Freddie Mac and Fannie Mae guidelines take other factors besides DTI into consideration, and Freddie can go up to an overall debt-to-income ratio of 45%.  And of course, this is fully documented income, so tough luck for the self-employed.
  • To refinance your existing loan for a better rate you would need a minimum of 25% equity, and if you wanted to take out any cash, 30% equity would be required.  Today’s requirements vary by lender, but are no where near that strict.
  • Pristine credit.  If you were 60 days late on any account in the past two years you would not qualify.

So to put this into perspective, let’s see what someone might be able to afford here inSan Diegowhere the median household income is $67,000.  Their total monthly housing expense, including tax and insurance could not exceed $1,563.  This means they could purchase a single family home for $295,000 (if they could find one that would qualify for conventional financing), but would need a down payment of $59,000.  Presuming their monthly take-home pay is $4,466 and they are currently renting a 2 bedroom apartment for $1200, and after all other expenses they could still manage to save $500 a month, it would take these would-be home buyers 9.8 years to save for the down payment!

What if you don’t qualify?  Get ready to pay-up.  The mortgage industry estimates that non-QRM rates will be from .75 – 3.00% higher, again pushing more people out of the market with higher rates.  So if you are like the majority of today’s borrowers and don’t have a big down payment, make an above average income and have perfect credit you could be paying 8.00% interest while the QRM borrower will pay just 5.00%.  Sounds really fair and I’m sure that will mean a big boost to the housing market, right?

This is a total over-reaction that threatens to kill the small gains and recovery that we’ve seen in the past year.  I agree that reforms are necessary, but requirements should not be so stringent that home ownership is only accessible to a privileged minority.  If only the wealthy can purchase a home, some of our troubled neighborhoods (where the QRM buyers won’t want to live themselves) will be owned by investors and would-be buyers will be doomed to a life-time of renting from them.  I don’t know about you, but to me this doesn’t sound like a way to re-build neighborhoods or salvage the American Dream of home ownership.

Just in time for Christmas, Fannie Mae put new rules into effect on December 13th that will make it even more difficult for homeowners who have had a foreclosure to buy again.

Under the new lending guidelines that control qualification standards for Fannie Mae backed mortgages, a borrower who has had a foreclosure will now have to wait seven years before being approved for a new mortgage.  That is up from the current wait time of four years.  Another provision of the guideline revision tightens the acceptable debt-to-income ratio (DTI) to 45%, down from 55%, and includes stricter scrutiny of all installment debt.  Under the new guidelines, even one missed payment on a credit card could mean the difference between approval, and not qualifying.  Fannie Mae currently guarantees 28% of all residential loans.

While we all understand the need to move away from the “if you have a pulse, you qualify” standards of a few years ago, these new guidelines seem downright punitive!  On one hand the Fed is pumping money into banks urging them to make more loans to stimulate the economy, yet at the same time the new regulations make it more difficult for banks to lend.   And why the increase from four to seven years?  There is no rational reason for this extended wait time.  The only thing I can figure is that this is intended to scare homeowners considering strategic default into continuing to pay an inflated mortgage on a grossly devalued home.

Although there are several provisions of the new guidelines that may benefit some borrowers, overall this is not an effective way to get the housing market back on its feet.  Thanks Fannie:  You’ve just provided one more reason why I believe we’ll continue to see an increase in short sales over the coming year.

For the first time since June, pending home sales (number of contracts signed), dropped in September by 1.8% according to the National Association of Realtors. The report was unveiled on Friday as the Association began its annual convention in New Orleans.  This came as a surprise to many as a group of Reuter’s polled economists had recently anticipated an increase of 3%.  So why the drop?

Paul Dales, U.S. economist for Capital Economics surmised that the lower number was a result of the recent foreclosure mess; deals signed in September, might have fallen apart in October as banks pulled some foreclosures from the market and buyers got cold feet.  But that doesn’t really make sense as the September drop occurred before any of the problems with foreclosure affidavits came to light.

I think that one of the most obvious factors is the continued unemployment rate that has now been at 9.5% or higher for the past 15 months.  People who aren’t working, or fear that their employment is tenuous don’t buy houses.  Lawrence Yun, NAR’s chief economist also pointed out that “tight credit and appraisals coming in below the negotiated price continue to constrain the market.”

So as noted in my post on November 3, Capital Economics continues to predict a bit more of a gloomy future for the housing market.  Dales says that “existing sales may well fall back,” and described housing activity as “bouncing along the bottom.”  NAR on the other hand continues to be a bit more optimistic, forecasting an increase in existing home sales in 2011 to 5.1 million, up from 4.8 million this year.  I’ll keep you posted as soon as I have the San Diego numbers for September, but I’m siding with NAR and remain cautiously optimistic about sales in America’s Finest City, especially if lenders loosen their stranglehold on the market by approving more home loans.

Remember back in 2005 when anyone with a pulse could get a home loan?  Well obviously, that didn’t work very well, but the qualification paranoia we see today may be equally destructive to the housing market.

I spoke with a client the other day who was grumbling about not being able to get a line of credit.  Mind you, this gentleman used to run a bank, owns 20 rental properties, his own home is valued at $1.5 million, and he owes less than $200,000 on all 21 properties combined.  And let’s add to that the $1 million plus cash in the bank.  He applied to an investment firm (which shall remain nameless) for a $200,000  line of credit in case he finds a great real estate investment opportunity.   After 3 months of supplying documentation several times over, (seems it kept getting lost), his application was denied because they couldn’t understand that he had moved a small amount of money out of an IRA for tax reasons!

So this is a man with exceptional assets, and he can’t get a loan…what about the rest of the population?  According to an article in SmartMoney it’s getting more and more difficult to qualify for a mortgage and even the smallest negative detail can either cost you an approval or thousands of dollars over the life of your loan.  A score of 720 is the ticket these days for a conventional loan with the best rates….that is up 40 points since the housing collapse.  Ed Mierzwinski of the U.S, Public Interest Research Group says that “Credit scores are a blunt tool being abused by creditors as if they were a sharp instrument.”

Ouch.  We feel the pain.  As a Realtor in this market with so many opportunities for buyers, it is extremely frustrating to see how difficult it is for home buyers to get a loan.  Granted, the credit requirements for an FHA loan aren’t quite as stringent, but the increased level of documentation is staggering.  A recent buyer of mine left me a message that was one long scream….she said she just had to vent after being asked by her FHA lender to supply a paper trail for the money her 90 year-old mother in Eastern Europe sent to her as a gift.  She sighed and said she was just waiting for the call requesting a blood sample.

So what can you do to improve your chances of getting a loan in this market?  

  • If you’re self-employed, plan ahead.  Banks will primarily look at your last two years tax returns, so your qualifying income is based on your tax returns.  Amounts on your returns should match financial statements and bank statements.
  • If you have any skeletons in the closet, deal with them before applying.  This might include things such as an unresolved judgment or child support payment issues.
  • Be prepared to explain ANY credit inquiries for the last two years.
  • Try to avoid any late payments for a full year prior to applying.
  • Maintain balances on revolving credit below 30% of your limit.
  • Don’t apply for new credit, and don’t close accounts.  Use zero balance credit cards now and then, but pay them off right away.
  • Don’t transfer money from retirement accounts.

And finally, stay calm and realize that over the next year as the number of people with less than perfect credit increases and the market continues to stabilize, it is expected that the banks will gradually release their stranglehold on qualification standards.  But be prepared, that call for the DNA test just might be next on the list.