NAR: Mortgage Disruptions At Work
A: Pending Home Sales Index falls sharply to a reading of 89.9, a 12.2% decline from June's reading, as mortgage commitments failed to come through on some deals. This should not be a shock to anyone that has been keeping pace with this rapidly changing lending environment of tighter loan/underwriting standards, fewer loan options, higher interest rates, and a dried up secondary mortgage market. It pays to know how macro affects certain markets!
Here is a chart showing the last 12 months of the pending home sales index:
As many buyers know, getting a loan pre-approval does NOT mean you got a loan commitment; I've said numerous times that Pre-Approvals mean sh*t!. The basic path of the process is this, which explains what happened here for the sharp falloff in pending home sales index:
BUYER GETS PRE-APPROVED FOR LOAN ---> BUYER BIDS FOR HOME --> SELLER ACCEPTS ---> DEAL GOES INTO CONTRACT ---> LENDER SENDS APPRAISER ---> UNDERWRITER GATHERS DOC'S FROM BUYER TO SATISFY CONDITIONS OF COMMITMENT ---> WALK-THROUGH ---> CLOSING
I BOLDED the uncertain areas of the loan process that can lead to a buyer not being able to get their loan commitment, and therefore no mortgage. No mortgage, no deal. Most contracts are structured with a finance contigency; that is, the deal is contigent upon the buyer receiving financing. If the buyer can't get financing, for whatever reason, the deal is voided and the security deposit returned to buyer.
A lender can get out of committing to a loan IF:
* Buyer doesn't satisfy conditions of commitment. One way this could happen is if buyer fails to prove financial state with supporting documents required by lender.
* Property appraises BELOW purchase price. Buyer refuses to put up extra money and can not get the commitment for the loan at the current purchase price. Either the deal is re-negotiated at appraisal price, or deal is not done
According to the NAR's statement following the release of this Pending Home Sales Index:
Lawrence Yun, NAR senior economist, said abnormal factors are clouding the horizon. "It's difficult to fully account for mortgage disruptions in the index, and our members are telling us some sales contracts aren't closing because mortgage commitments have been falling through at the last moment," he said.Okay. So all lenders have to do is focus on the essentials of credit worthiness and avoid speculating on what may happen in the future? Are you kidding me? If this were to happen, 50% of buyers outside Manhattan wouldn't get a loan given the current environment!
"If lenders focus on the essentials of creditworthiness and adjusted valuations based on comparable sales, and ignore speculation on what might happen in the future, broader stabilization will come sooner rather than later," Yun said.
Folks, what you need to know about this leading indicator of future existing home sales, is that the end is NOT NEAR! This reading is telling us that future existing home sales data is likely to be bad and that a growing reason is because lenders have been tightening underwriting standards and are starting to BAIL from committing to the deal right before closing, read my posts "Living In A Tougher Lending World" & "Insider Mortgage: Underwriting Standards" where I discussed this ! Whether that it is because the property is appraised at a lower value than the purchase price OR the buyer doesn't meet commitment standards for the deal is the question! Either way, it's not too good for anybody and is just another leg powering the housing downturn process.
Don't believe everything you hear from these types of organizations; I don't care what my colleagues or my employing brokerage has to say when I state this. Buyers and sellers deserve to know what is going on and should be given unbiased analysis of the data that is presented. Transparency is key to savvy investing and this dataset simply implies that the mortgage markets are still in turmoil, standards are tighter, underwriting means something again, appraisals must come in from unbiased third party, and some deals are going sour. Done and done. Spinning it any other way loses credibility in my opinion.
Posted by home loans financing
Wed Sep 5th, 2007 01:25 PM
Hi,
Thanks for sharing this post. It could increase people's idea with regards to this topic, especially for those who are engage in mortgages. Anyway, great post.
Posted by Bobby
Wed Sep 5th, 2007 08:31 PM
Noah, you candidly said this:
"Don't believe everything you hear from these types of organizations; I don't care what my colleagues or my employing brokerage has to say when I state this. Buyers and sellers deserve to know what is going on and should be given unbiased analysis of the data that is presented."
I am somewhat shocked that you feel pressured from other brokers not to tell what is going on. Do they expect you to say that, "New York is a different market"? :)
Posted by Noah
Wed Sep 5th, 2007 08:52 PM
I think they expect me to AVOID saying the truth that red flags are out there and second thought should be given!
Sales agents and employing brokers have a tendency of spinning the best angle on every situation. When a red flag comes up, then its a great time to buy. If the market is super hot, its a great time to buy. It's always a great time to buy!
I just think more unbiased analysis is due to consumers! And yes, powers that be do on occasion ask brokers NOT to talk to media about headlines for fear of saying the wrong thing, or to take the only positive article out there and send it to all clients as proof everyting is just fine and dandy! Pisses me off sometimes.
Posted by guest
Wed Sep 5th, 2007 10:32 PM
Noah - since you pride yourself on being so objective, please post an article on the things you are hearing other brokers (or other real estate professionals) say about the current state of the market (no names, of course). You can always tell who's a broker on these blogs because the spin is glaringly obvious, but I for one would be quite curious to hear what they are really saying behind the scenes.
Posted by Noah
Thu Sep 6th, 2007 08:52 AM
Guest - Hmmm, that certainly would be interesting and Im working on a tool for Manhattan, a market meter of sorts, that would be 50% based on a broker survey of current market conditions.
If I succeed, you will have a great resource from that angle. Try to hang in there for a while as this takes time to build.
In meantime, Ill see if I can do some posts about what my colleagues are seeing.
Posted by Viktoria
Thu Sep 6th, 2007 12:02 PM
Noah, is waiving the mortgage contingency still common in the Manhattan market? We are buying a 1 bedroom, and each time we made an offer we were asked by seller's brokers to waive the mortgage contingency. Do you think that other buyers are still willing to take that risk in this kind of market?
Thanks,
Viktoria