For the time-pressed, there's no better snapshot of the housing market today, compared to three years ago, arguably, than the following: Condo mania
In late 2006, two colleagues who own real estate holdings were considering a new venture. A bank wanted to lend them about $2.5 million to buy 10 investment condominiums in a recently-built complex. At that time, the U.S. economy was growing, the housing market was booming -- with home prices increasing by more than 15-20% per year -- and credit was widely available.
The bank was willing to write a commercial mortgage for the investment condos for a modest, variable interest rate, and with only a low down payment. Each colleague approached me about becoming a potential investor in the deal, as a third partner, but I turned them down. Only 4 of the condo units were sold, and the prospect of the carrying costs if the remaining units were not sold/leased was way too much risk for yours truly. The others said the bank was willing to write another loan -- a 'bridge loan' -- to cover those carrying costs to complete the deal, with the bank arguing that those additional costs would be recouped by the higher sales price, when the unoccupied units were sold or 'flipped.'
A loan to pay money on a loan you can't service? Hmmm. With that, I put the deal in the category of "mega risk" and said "no deal" very quickly. That turned out to be prudent, as 4 of the remaining 6 units did not sell quickly, the condo market tanked in late 2007, and the bank ended up foreclosing on the complex. The two partners, and a third partner they later took on, lost a considerable amount of money on the deal.
Sorry, we can't help you
Then, early this spring a married couple, a friend and his wife, applied for a mortgage for an owner-occupied home in Larchmont, N.Y. which would be a trade-up for them, as they need more space due to a second baby on the way.
His/her FICO scores: 730/720. Home price: $795,000. Down payment: about 25%, or $200,000. The couple's income exceeds $250,000 per year. Mortgage request: $595,000. Decision: Mortgage denied.
One bank expressed a concern about the possibility of future home price declines in the 2-3 year period ahead, which could put the note underwater (the loan exceeding the home's market value). A second expressed a concern about income stability, (the husband works in the insurance field, and some of his income is commission-based).
Housing Sector Analysis: What good is it having more money available for loans, if banks aren't lending the money to good-credit potential home buyers? It's hard to see the U.S. housing market turning around in this environment.
Moreover, the above also underscores how some banks have pulled the lending reins in too tight. Three years ago, a bank was willing to provide 100% financing on a $2.5-million, speculative, 10-unit investment condo complex. Today, good-credit, qualified home buyers are having trouble getting mortgages for owner-occupied homes. For the U.S. economy to grow at an adequate rate, this has to change.
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Financial Editor Joseph Lazzaro is based in New York.
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Reader Comments (Page 1 of 1)
7-14-2009 @ 8:56AM
Donovan said...
Ah yes, even having a pre-qualified mortgage approval doesn't mean you have a done deal these days, when it comes down to all your mortgage documents having final approval, and are fully in order for closing.
It seems some Realtors are adding a little endorsement clause to the buyers contract these days. That clause being, that for "ANY" reason the sale of said property should fail to close. The buyer agrees to forfit any earnest, or escrow moneys being held. It seems with all these new lending requirements the banks have now set forth. Many deals just fall apart at the last minute. This can range from a bad home inspection report, to the borrowers/buyers bank appraiser, just not quite hitting that assessed value of the home, the bank is looking for.
So, needless to say this "failure to close" endorsement at least insures the buyers and sellers Realtor(s) they will be making some money off the deal. As opposed to a complete financial loss on their commission(s) if the deal should fall through. So buyers, watch out for this new little, perhaps very costly clause in your purchase contract.