Living In A Tougher Lending World
A: I think back to November 2001 when I first bought real estate here in Manhattan. For the most part, the memory is still there although being almost 6 years ago. I was a NASDAQ Equities trader with Tradescape (at the time I was trading for over 3 years) and recently went through 2 very dramatic events; the dot com crash and 9/11. Trading was not only volatile but it was physically and emotionally draining at that time. As a contrarian investor seeking to buy my first piece of NYC real estate, I was disappointed that I couldn't get what I wanted for the price I was able to afford. I started following NYC real estate aggressively in 1999 when I started making money. With 9/11, the NYC real estate market had a brief but sudden correction; nobody wanted to hold on to properties and all of a sudden deals were to be found. My eyes lit up and I signed a contract in November 2001 and closed on the property on April, 5 2002; some 5 months later. Why so long? Because I had such a tough time getting my loan! The past has finally caught up with us!
I recall the seller being super pissed. I recall my attorney doing everything he can to buy me more time to secure the loan. I recall weeks and weeks of phone calls with my lender demanding more documents to back up my income. This is February & March of 2002. This is before lending standards starting loosening up so drastically which helped power the recent national housing boom. This was the time when the 30 YR fixed rate fell to 6.875%, and continued to fall for years after; I ultimately refinanced in 2005. This was the time I thought I would lose the deal of a lifetime.
I purchased a 1,093 sft JR4 condo at 245 East 93rd street for $500,000; Denice Rich of Corcoran was the selling broker. Actually, the sellers were asking $479,000 for the property because they wanted the place sold in '2 weeks time'; a bidding war erupted in the first 3 days after 40+ people packed the Sunday open house. An aggressive strategy that was common for that time period in New York City as residents had the fresh scare of terrorism in their minds and buildings were still being evacuated at least once every week or two for safety precautions; sellers wanted out! A crazy time to be buying to say the least but a good time for any contrarian investor who sees the longer term reward potential that comes with buying an asset that is down & out with mainstream investors.
But I almost lost the deal. I had trouble getting the damn loan commitment because...
1. I was a self-employed Equities Trader working AFTER the market crashed
2. I had declining income reported in 2001 compared with 2000
3. I had to come up with the last 3 years Tax Returns
4. I had to take a higher interest rate that I originally had a problem with
5. I had to provide bank statements & pay checks for last 3 months
6. I had to get a expected income verification letter for 2002 from my CPA saying my income would rise from 2001's.
It was hell. The whole process totally drained me. As if trading in a post stock market crash environment wasn't enough I had to deal with angry sellers, relentless sellers' attorney's, a tough lender, a hard trading market, and the questioning that comes with buying after the worst terrorist act in recorded US history. But the deal was too good to pass up on and I was determined to put up with the headache of getting that loan commitment so I can proceed to closing. I did and I finally closed on the property in early April, 2002.
The only reason it took so long was because I had to prove to my lender that I actually earned what I said I earned and that I could actually afford this property going forward. And for those that say, 'why didn't you call a different lender', I did! No one else would talk to a self-employed equities trader after the markets got hit so hard! Oh, one lender offered to work with me at a rate of 8.75% for a 30YR fixed; I didn't bend that far!
My Point: We are returning to a lending environment more like this! We are in the very early stages of tighter lending and underwriting standards after we got so used to no standards at all for the past 3-4 years! Looking forward, buyers will have to prove their earnings and employment. As Michael McGivney, a Wells Fargo Private Banker, said back on Aug. 10th:
Last week, a client getting approved for an interest only product, like a 5 year ARM, on a $500,000 loan qualified on the payment of $2604 at a rate of 6.25%.And they will need to have the documents to prove that income before the loan gets committed to! Adjust accordingly and be prepared! This credit squeeze is only 5-6 weeks old in the tradable markets minds; although many have been waiting for this to happen for years.Today, that same client, to qualify for the same loan, will need to have enough income to qualify for the "fully indexed, fully amortized" payment. That means they MUST qualify at a rate of 11.25%, fully amortized. That means a payment of $4863!!!!!! That's nearly DOUBLE the payment. That means they must have nearly DOUBLE THE INCOME!!!
It's going to take more than a few months to adjust to such a different world after years of loose lending standards. For any seller thinking about accepting a deal from a buyer whose income is derived 100% via self-employment, be sure that they can back that up with documents so you have no issues with the deal closing!
For more in depth talk on this topic, read my post last week titled, "Adjust Your Risk Tolerance For Loans".
Comments (13)
hi -
thanks for sharing this story...curious what your fico score was at the time?
cheers. p e r r y
Posted by perry | August 22, 2007 10:31 AM
perry - well credit system changed since then and score meaning is different. But I think I was in middle range because I had old non payments from a stupid Bloomingdlaes credit card when I was in college that I never knew about that adversely affected my score.
It wasnt a credit quality issue, I recall that. It was a self employment issue and nature of my job.
Posted by Noah | August 22, 2007 10:36 AM
Its probably technically more correct to rename to title to "Living In A NORMAL Lending World"
The last few years was a complete bizarro world, we're just returning to normal lending standards..
Seriously, if you personally were going loan out 500,000 to someone you would do a full cavity search on their financial status.. why do people expect banks not to do the same now??
Posted by uwsider | August 22, 2007 11:02 AM
uwsider - ha..funny you say that because I changed title 3 times before saying, ah screw it!
your 100% right! Except for the cavity search.
Posted by Noah | August 22, 2007 11:08 AM
Great story -- really puts the loose lending standards of the last couple of years in perspective. Good for you for sticking to your guns and seeing the deal through.
Posted by ril | August 22, 2007 11:10 AM
Great post. Spot on in terms of whats in the market now. As someone who just went through this loan approval process - you are ok if you have a good credit and all your documents in place.
Also helps if you go with the larger players that have a good foundation and strenght/industry positioning like Wells Fargo or Cit. I had a high score, and went with Wells and so far no complaints. Actually surprised that this was less invasive than anticipated. It was very easy to print off my bank statements , copies of my pay stubs, 401K statements etc. and so dropped off a list of docs in the morning and was confirmed for closing that afternoon!!
Again, as one of the other comments point out, banks need to look out in this time of high foreclosure and so this tightening in the process is not surprising.
Noah - thanks for your input and insight in your chat window. Greatly appreciate the service you are providing and making this a great informative site for all real estate investors! Good blend of market info as well as macro economic analysis all of which is useful and very valuable for all. Keep up the good work!
Posted by Mtownwest | August 22, 2007 11:29 AM
i disagree. The credit crunch is almost over. Few more bumps in the road, but almost over. I have no issue geting a mortgage today. I am just deciding on the right product. If you have a steady job, can afford 20% down (might not put 20% down but can affod to put it down if you want to), you can get a loan. THe paper is starting to move through the system now. Not like before, but it is moved. NYC prices will do exactly what they always do. Trend sideways to lower in the fall, and if bonus' are good, way up starting January.
Posted by Mike | August 22, 2007 12:18 PM
Thx for comment Mike. I have to disagree though.
4 YRS of loose lending standards + $260B of subprime ARMS set to reset at higher rates in 2008 seem to be of concern.
I dont think a 5-6 week shakeout is enough to get through this mess. I think many hedge funds will go under, many lenders still have to book assets to market value, and major banks will have to write down losses in the future. All of this will make standards for lending to remain tighter.
But appreciate your opinion.
Posted by Noah | August 22, 2007 12:45 PM
Noah - ARMS reset all the time. Heck I have been in a 6mo libor arm for 3 years on one of my properties (and still way ahead of the game). ARMS will reset in 07, 08, 09 etc. If you assume the lowest rates were a year or two ago, 5 year ARMS have 2 years left. I'm sorry but while I think some parts of the nation will have issues, NYC certainly will not. I am also not sold that the Fed will cut rates in September. They are encouraging every bank out there to borow at the discount window and they are, The market is heading higher because earnings are great and the market PE is low. Dont get me wrong, there will be some sector suffaring back to normal, but in general, status quo. I apprecaite your enthusiasm here and it is definately an exciting time in the markets, but the fun is almost over.
Posted by Mike | August 22, 2007 1:25 PM
Im not overly enthusiastic at all. Im waiting to see effects on economy, jobs, and global growth. Nothing good lasts forever.
NYC fundamentals are in tact, but that can change. Im not worried about your resetting ARM, Im worried about those low quality buyers that bought more house then they could afford and rationalized it by taking out a 3YR or 5YR ARM.
More defaults --> more prob in secondary mortg markets --> more losses on lenders books ---> more trouble...plus we dont know what effect, if any, this might have on economy yet.
Personally, Im waiting for a buying opportunity. If it doesnt happen fine. I sold last July. But I will buy in NYC. Thats for sure. Still an untold story.
Lets see how it plays out! Thx for comments!
Posted by Noah | August 22, 2007 1:30 PM
I am trying to get a mortgage right now. I have called a few lenders in town (Countrywide, Wells Fargo, Citi.. etc). Except for small variations in the closing cost, it looks like the quotes that they give me are all the same, 6.5% for a 30 yr $417K, 6.125% for a 15 yr. Is there a need to shop around? Does a loan officer have the power to lower the standard quoted rates?
Posted by Jerry | August 22, 2007 2:05 PM
Thanks for sharing your story, Noah. It really puts things in perspective. One lesson is that there's never the 'best' time to buy or sell, keep plugging away if owning your own home is a goal. Also amazing how spoiled we've become given the lending environment the past few years.
Posted by newbie | August 22, 2007 2:28 PM
When you buy real estate in Manhattan you have people(condo co-op boards forcing you to use traditional conservative lending versus subprime lending. The Manhattan market due to it's own efficiencies will sidestep this "credit crunch" and come out looking like roses. After the liquidty crisis has passed(this too shall pass) and homebuyers see that Manhattan thrived in a seemingly messed up mortgage environment they will now more than ever want a piece of the island. Call me a visionary, cheerleader whatever (I am an investor)but that is how I see it. Thank you co-op and condo boards!
Posted by Steve | August 22, 2007 4:22 PM