Tuesday, August 14, 2007

First, Last and Second Chances

WSJ was awash today in news of market turmoil related to credit and mortgages. One article cited the fact that previously 70% of appraisals resulted in loans, today that has been reversed, and now 70% of appraisals result in rejections.

When the purchase price and appraisal on our home ended up being the exact same amount back in 2002 (we purchased with a no money down loan), it was a glaring sign that there was something suspicious and self-reinforcing going on in the RE industry.

Today the effects of this turmoil are starting to be felt by more members of the general public. The cost of jumbo loans are going up and loan products like the one we used to get into a house are starting to dry up. I honestly don't know how any first time home buyer can afford to get into this market now (on either of the coasts). Until something comes along to change that fact, I don't really see this market recovering.

I heard somewhere that if its been over 3 years, you qualify for first time home buyer loan products. At this rate we may get a second chance at a first time.


mr big said...

I think the lending industry is shooting itself in the foot right now.They make all these products available that inflated property values and now they take them away. Not very many people have 20% down.You are going to take a lot of people out of the market and crush property values thus more homes back to the banks.they are doing the worng thing right now.They should keep the loan products available to people with great credit who need them.loaning to people with 500 credit scores is not very smart anyways as we are seeing things blow up.

Cmyst said...

I suspect they will modify some of their qualifying criteria and begin to offer more financing in the future. I don't think they'll do it before the end of the year, though. Mostly because they just don't have the investors willing to take the risk right now.
California really shot itself in the foot over this bubble. It's always been more expensive to live here, but the advantages outweighed the cost for most of us. Now, the median family income can't afford a decent home, and people that can afford a decent home don't have the necessary down payment.

Gwynster said...

CFHA won't go away. It's a 3% down product but what kills it in this area is the 29% DTI FIVA. That 29% is based on Piti, not just the mortgage balance.

Frankly, I no longer think most people can be trusted to balance their own check books, forget managing the financial responsiblility of owning a home.

Me, I keep an excel file that has every expense recorded by month from '95 and I project my budget out 10 yrs at a time. I update it daily. Mr. Gwynster thinks it's freakishly cute. I think it's just my financial paranoia showing. I'm terrified of becoming the bag lady on the corner eating beans out of a can.

Back to the topic. I have no problem with keeping the lending industry tied to conventional mortgage requirements. If we had done that in the first place, this whole mess wouldn't have gotten so out of hand.

David said...

I mostly agree with gwynster. If the banks hadn't given everyone these weirdo loans the prices would have never gotten this high and people might actually be able to have a down payment. $20K 5-6 years ago would have been a nice down payment on a house, now it doesn't do you anything. And I'm personally glad the banks are shooting themselves in the foot; now I might actually find a descent place that I can afford.

AgentBubble said...

When the purchase price and appraisal on our home ended up being the exact same amount back in 2002 (we purchased with a no money down loan), it was a glaring sign that there was something suspicious and self-reinforcing going on in the RE industry.

Here in our area, you'll find that the appraiser's job is just that--to make sure the house appraises for the selling price. In my 10 years, I've never seen an appraisal for even a $1 higher than selling price. I've seen them lower, but never higher.

Anonymous said...

Appraisal - It is not the buyer/owner that controls the appraisal but rather the lender. I also had a house come in just right when I bought (and probably higher than it should have). However, when I requested a new appraisal after owning a couple of years (to prove 20% equity and therefore dump the PMI) I was surprised at how LOW the appraisal came in.
Then when I attempted to get the appraisal from the company who performed it they informed me that they would not give it to me and that I had to go to my lender. I have to say that blew it as I explained to them that I was the one that paid for the appraisal and that the lender had requested it on my behalf. (side note: the appraisal barely came in at the 20% although my analysis indicated it should have been qite a bit higher).

Lending - I just don't understand why the lenders don't get smart. They should be placing more of their focus on keeping their current lendees in their homes and paying the mortgage. It would cost them a lot less in the short run (7 years) and pay them a lot more over the long run if they would work with their lendees and get them moved into a smarter long term loan they can afford.
Which is better: allowing the current mortgage to reset to a payment that will require the owner to default and therefore the bank ends up with a property they don't want and will lose money on (since they won't let that person refinance), or, provide a 'roll-over' mortgage option that allows the owner to change over to a, say 40 or 50 year, fixed rate mortgage they can afford. Option 2 is a win-win for everyone that accepts. I think I remember hearing of one company doing something like this. Of course from a miopic perspective as an owner in waiting I hope they don't and they let the RE prices tumble (miopic because it doesn't take into account the devastation they are creating on my investment portfolio!).