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.

"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.

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!

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.

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