Living In A Tougher Lending World

Posted by urbandigs

Wed Aug 22nd, 2007 09:30 AM

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!

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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%.

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!!!
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.

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".

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