Existing Home Sales: (Earth to NAR) Tighter Lending Standards are Not the Problem

by Alex Stenback on September 24, 2008

Another ugly print from the National Association of Realtors, who’ve today released the August existing home sales numbers:

  • August sales declined 10.7% Year-Over-Year.
  • August median prices declined 9.5%, YOY.
  • Inventory remains elevated at 10.4 months supply

Despite the ugliness, the contraction does seem to be decelerating a bit, so there is a sliver of good news here.

Predictably, tighter lending standards are held out as the culprit (emphasis ours):

The difficulty in obtaining a mortgage increased over past couple months, making it more challenging for creditworthy borrowers to find financing,” he said. “Our hope is that overly tight lending criteria can be loosened with reasonable standards and credit so that sales activity can catch up with demand.

This is, IMHO, utter bunk.

The idea that "obtaining a mortgage right now is all but impossible" seems to be seeping into the national consciousness, aided and abetted by mainstream media and press releases like this, so let’s push back on this notion a little.

We’d argue that mortgage lending standards remain very reasonable, and that the problem is not "overly tight" standards, but that we are reaping the whirlwind caused by lending standards that were far too loose for far too long.

Stay with us on this.

The loose lending era stimulated a lot of artificial, unsustainable demand, which drove prices way out of line with any reasonable market fundamentals.

It is the aftermath of this era – too much supply and not enough legitimate demand – that’s driving prices down and putting many homeowners ass over tea kettle on their mortgage, not tighter lending.

No amount of yearning for the ridiculous-redefined-as-reasonable lending standards of three years ago will fix that. Those days are thankfully gone, they aren’t coming back, and we’ll be lucky if we escape the whole mess with an intact financial system.

[quick aside: It is also amusing that an organization so quick to blame the Media for "talking down" the real estate market is essentially trying to convince the public that mortgages are so hard to get you shouldn't even bother to try, when that really is not the case.  We'd argue this hurts demand, and does not help their cause.]

Now, lending standards have tightened, for sure, and the cost of borrowing for some (still creditworthy) borrowers has increased, but just as a for instance:

Here’s a snapshot of what a typical (average credit, has a job, with a non-excessive amount of consumer debt) owner occupant borrower can do to finance a home in the Twin Cities:

  1. She can purchase a home, using conventional 30 year fixed rate financing, for 5% down.
  2. She purchase a home, with 3% – 3.5% down, with an FHA 30 year fixed rate mortgage.
  3. She can purchase a home, using "Jumbo" (loan amount > $417K) financing with 10% down.
  4. She can split a Jumbo loan in two, using a conforming (<=$417k) first mortgage, and a second mortgage, to avoid egregiously high "Jumbo" fixed rates.
  5. She can qualify for a monthly mortgage payment that takes up more than 50% of her gross monthly income.
  6. If she happens to be a first time buyer, she can get a reduced interest rate and up to $15,000 in targeted down payment/closing cost assistance.

With the exception of Jumbo financing, in any of the above cases, even assuming the very worst (but still acceptable) credit profile, our borrower would be hard pressed to pay more than 6.75% for a 30 year fixed rate, and if she had good to very good credit, a rate of 6% or less is in play.  Hell, with an FHA, the down payment does not even need to be hers – it can be a gift from a relative.

Now we ask you, in reading the above, does this strike you as an "overly tight" lending environment?

And to the Realtors in the audience: Don’t be afraid to let your clients know that getting a mortgage is not as tough as they may have been led to believe.  Come on in, the water is fine.

{ 4 comments… read them below or add one }

Richard September 25, 2008 at 2:54 pm

For anyone who didn’t come of age during the housing boom, these “tighter” standards are not draconian; they are more like a return to normal.

As for the existing home sales data, the most under-reported number from the August release is that the August number exactly matches the December, 2007 number. In other words, when they report that 10.7% y-o-y decline, all of the damage was done late last year, not this year!

Jeremiah Arn September 26, 2008 at 2:45 pm

While declines are not pleasant, this isn’t SO bad. UK sales are down 56% Y-O-Y!!!

The problem is not tighter or looser lending – its funny money and central planning. Let banks and homeowners take responsibility for their actions and the world will be better off.

Chuck September 28, 2008 at 9:16 am

“qualify for a monthly mortgage payment that takes up more than 50% of her gross monthly income.”

Ay Carumba! There are loan programs that allow approx. 50% DTI?! Is this a Gov Agency loan? Please post a URL to more info. Thanks

Alex Stenback September 29, 2008 at 8:19 am

Chuck – There won’t be a url for this.

The way mortgage banking works today, there aren’t hard and fast rules for what is and is not an acceptable debt to income ratio for a borrower.

These are determined by the automated underwriting systems/software, which are basically credit engines on steroids. The vast majority of all mortgages originated today start with an automated decision – whether FNMA/FRE, FHA – the investors require them.

Anyway, that’s why there aren’t any published guidelines that say “debt ratios in excess of 50% are allowed” – in fact, all of the written guidelines still talk about the old 29/36 debt ratios OR “as determined by automated underwriting.”

And I can tell you as a guy that does 150 or so loans a year, exceeding the standard debt ratios is more a rule, than it is an exception, when it comes to these automated systems.

They systems routinely return findings allowing loans with debt ratios in excess of 50%.

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