How Credit Squeeze Reveals Itself

Posted by urbandigs

Thu Oct 11th, 2007 09:41 AM

A: OK, after a long talk with a trusted and very successful colleague of mine who is at a different brokerage firm, he told me of what happened to his deal 3 weeks ago that fell apart. Its an example of in what form the credit squeeze effects us here in Manhattan. To say its an isolated incident and that this situation hasn't happened anywhere else or won't happen anymore, is naive. The key to this story is: THE APPRAISAL DIDN'T COME IN!

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One of my stated effects of the credit squeeze has been tighter lender and underwriting standards! If you break that down to its core, then you can include the role of the appraiser in the underwriting process as most lenders utilize a third party appraiser for an unbiased report on the property's market value.

As the secondary mortgage markets continue to not function normally, lenders will keep standards tight and try to make the higher quality loans to their books. The days of no money down, aggressive loans for very weak credit, and aggressive appraisals to meet the # are over! Either you realize that or continue to live in fantasyland; which I hear its very nice.

Here is the TRUE, REAL LIFE example of what happened as I relay the events of the story (the colleague, bldg, and firm obviously will remain anonymous):

I HAD A DONE DEAL. OFFER ACCEPTED, CONTRACT SIGNED, DEPOSIT IN ESCROW, AND BOARD PACKAGE HANDED IN TO THE MANAGEMENT OFFICE. THE BUYER WAS QUALIFIED, AND WAS PUTTING 10% DOWN. THEY WERE PRE-APPROVED FOR A LOAN. THE PROPERTY'S SALE PRICE WAS $565,000, ABOUT $40,000 HIGHER THAN THE LAST LINE COMP FROM 12 MONTHS AGO. THE PROPERTY WAS IN MINT CONDITION AND TOTALLY RENOVATED, BUT ON A LOWER FLOOR WHEN COMPARED TO THE LAST COMP. THE SELLER HAD THE PROPERTY APPRAISED FOR A HELOC 14 MONTHS AGO WHICH CAME IN AT $515,000 W/OUT THE RENOVATIONS. THE BUYER'S LENDER APPRAISER CAME IN AT $505,000, SOME $60,000 BELOW THE PURCHASE PRICE, EVEN AFTER THE RENOVATIONS. THE APPRAISER OBVIOUSLY HAD PRESSURE TO BE CONSERVATIVE AND AS A RESULT THE LENDER WOULDN'T COMMIT TO THE LOAN. THE BUYER GOT SCARED AWAY, GOT HIS DEPOSIT BACK, AND THE DEAL WAS DEAD! I HAVE NEVER SEEN AN APPRAISAL COME IN SO FAR BELOW AN AGREED UPON PRICE.
What happened here is a real life example of the tightening of underwriting standards and the change of environment in the appraisal world! Gone are the days of appraisers whimsically 'making the #' so the deal would go through!

This is part of the new world we live in. While it's good for the long run and for the lending industry, its an unavoidable side effect from the drunken party of low rates and lax standards that we had for the past 4-5 years! It's also what led me to write that forward looking post about "New Dev Closings: A Potential Problem" the other day, where I stated:
"WHAT ABOUT ALL THE BUYERS THAT SIGNED CONTRACTS ON EXPENSIVE NEW DEVELOPMENT PROPERTIES BEFORE THIS MESS HIT, AND WILL NOW CLOSE THEIR DEAL IN A LENDING ENVIRONMENT THAT IS TIGHTER & MORE EXPENSIVE?"
That doesn't mean the market is going to sh*t and about to experience a 30% decline! That also doesn't mean I'm predicting the market. It means I'm trying to explain to you, like I always do, what is changing in the macro economy, why it's changing, and how it will wind up effecting you and I in this crazy market we call Manhattan real estate! What other brokers, besides Doug Heddings of True Gotham who wrote about his credit crunch casualty, will talk publicly in an unbiased manner about this stuff!

The credit squeeze will reveal itself in a number of ways including:

a) appraisals being much more important & conservative; gone are the days of aggressive appraisals to make the #

b) higher rates reducing affordability as risk is re-priced for mortgages

c) tighter lending / underwriting standards requiring higher credit scores, doc's to back up assets, and employment checks

This is the real world. It has changed. Either you are educated about it or you aren't.

SELLERS & SELLING BROKERS - This market is slower than most would like to admit. Yes, inventory is tight and stocks are at record highs, but buyer confidence has declined a bit and there is some caution in the mindset of the buyer pool. Sellers MUST adapt to this and price properly if they truly need to sell; if there is one constant it's that properties are never worth what an owner thinks its worth! There are two gods that you must appease to get a deal done: the BOARD GODS & the LENDING GODS! Right now, the lending gods are stubborn so think about the ramifications of pricing high and getting lucky enough to procure a buyer willing to pay that price; as chances are the appraisal may not come in causing the deal to go sour unless the buyer picks up the difference!

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