Following housing’s bouncing ball
I frequently hear housing experts use the phrase “bouncing off the bottom” when they talk about residential price trends. If prices tick up then tick back down we have just seen a bounce.
This makes the experts look smart, until one considers that the bounces are going downhill indicating that there was no true bottom. Did you ever see the old “Little Brown Jug” cartoon, in which viewers were invited to sing along and “follow the bouncing ball”? What they didn’t tell you was that the little little brown jug was filled with hooch that got all the animals drunk and distracted. Is that what is going on here?
The “bouncing along the bottom call” is similar to a technique used by stock pickers on CNBC who claim to be “cautiously optimistic,” so they can play both bear and bull, depending on which way the chart blows. If the market goes down, well, they warned us to be “cautious”! If it goes up, well, they told us they were “optimistic”! Speaking of bad calls, I have also heard “housing experts” float the idea that lending institutions in this country will ease up their current lending standards. Their hope is, of course, that more home buyers will qualify and thereby increase the number of buyers in the market.
Perhaps nobody wants to be the bearer of bad news. Perhaps nobody wants to throw up their hands and admit they just don’t know what 2011 and 2012 will look like in the real estate market
? Or are they all short sighted and have even shorter memories? None of the hopeful comments by the housing experts, thus far, seem to acknowledge hard, cold facts.
Confounding matters more, President Obama is now focusing back on housing. At a Twitter town hall held last week he said that the progress made with the foreclosure crisis is “not enough. And so we’re going back to the drawing board, talking to banks, try to put some pressure on them to work with people who have mortgages to see if we can make further adjustments.”
The Obama administration has admitted that none of the federally sponsored programs to assist struggling homeowners, and thereby stabilize and begin to increase home values, worked. So now his administration is beginning to come up with yet more novel “solutions” to the housing crisis.
Evidently, we have not learned that it is not and should not be the Federalgovernment’s job to boost housing prices?
All of the above tells me that none of the experts has the tools, the talent or the short and long term memory required to provide insight into potential solutions to the housing crisis.
The truth is there isn’t too much that can be done without going to back insensible lending standards.
The pool of qualified buyers has shrunk and will not grow until incomes grow, and unemployment drops. Last week ought horrible jobs number to knock sense into the talking heads on TV. Unemployment is up, incomes are down, and not enough people qualify for loans to make a dent in the housing inventory glut. And it is completely sound and reasonable that a borrower will not be given a loan unless that borrower has the income, assets and credit score to prove him a good risk to repay the loan.
There are three core standards of good lending: a good credit score, fully documented income and verified assets.
These simple pillars of lending should not be changed because the principal goal of those standards is to ensure that the borrower has the capacity to pay back the loan.
If we change these pillars, then we risk inviting home owners into the market that can’t keep or pay off their home.
I have also heard hopes expressed that more innovative loan products will evolve, to attract more buyers.
My reply to that is that if ever I see or hear advertised again a 1.25% Option Arm loan, I will know my sins have caught up to me and I am now in Hell.
The days of sub prime 100% loans stated income 2/28 and 3/27 loans are gone because those are formulas for disaster. Creative financing creates trouble.
So, when I hear the idea floated that lending standards should ease, I want to ask what changes to guidelines or loan products would be economically feasible, and likely to spur massive growth in home buying?
Anyone? Anyone?
The fact is there is not a good answer to the question above..
Look, I know all too well how frustrating it is to obtain a mortgage these days. Even the most qualified borrowers I work with tell me the process of getting a mortgage feels like an FBI interrogation. Don’t be fooled or lulled into a daze by the “bouncing ball” or the pie in the sky hopes.
There is no way Freddie, Fannie, FHA, or the Banks will ease up lending standards spurring a new wave of home buyers to pull this market upward. We may even have further to fall.
With the economy in a rut and a possible recession coming in the next few years, the financial institutions will continue to be cautious with lending. The housing boom lasted a long time and the struggle to regain footing after such a hard fall will take a long time as well.
Logan Mohtashami is a senior loan officer in his family run Mortgage Company, AMC Lending Group, which has been providing mortgage services for California residents since 1987. LoganMohtashami.com
Read more: http://www.benzinga.com/general/politics/11/07/1763448/following-housings-bouncing-ball#ixzz1S0teIsXN
Logan,
Good editorial and I find them very insightful and apolitical (makes them readable). I worked for Wells Fargo Home Mtg for a year back in 2002 and for another local mortgage banker for about three months this year before deciding to take a salaried job outside the industry.
I wanted to comment on a couple things relating to your “bouncing” editorial and hopefully get your feed back.
My wife and I apparently did what idiots do and purchased a NEW home a couple months ago. We originally were going to put down 15% but came up with 20% at the last moment (I truly question if that was a good idea…). At no point through the process, and I knew the process VERY well, did I feel like it was an FBI interrogation. I certainly understand that things are more difficult and in our case we had 750 – 805 credit scores. They asked for the standard information and the only thing that tripped us up were a $4k deposit from my Mother inlaw for our son’s school tuition and a transfer of funds to/from our savings and checking accounts. Obviously we needed a gift letter and that was easily obtained. In accordance with that, and to indicate how things have changed, my Mother inlaw was contacted about a week ago to AGAIN verify this was gift – well after the loan had closed and been funded. And to think, these lenders three years ago would not have even asked for a bank statement or proof of income. No doubt, the process of determining what paperwork was needed and the dates needed and what problems that paperwork may cause (what would they request next based on what they see on a bank statement from two years ago).
Moving on…
Many people would tell me that I’m an idiot for purchasing a home and even dumber for purchasing a new one. But I can tell you that in my city (Denver area) rents run much higher than what my mortgage payment is…including taxes and insurance. Yes, I’m aware of all the supposed money sucking sounds my house makes between the first of each month but even then it doesn’t equal more than a $100 a month. So with that said, if you qualify and your needs are specific in regards to the house you live in (location, bedrooms, etc)…and you MUST live somewhere, why would you not buy? Outside of concern over a significant drop in prices again, if I have to pay $2k a month regardless of whether I own or rent then why not get SOME equity out of that $2000 payment? I don’t understand the hate! If I buy a $300,000 house I can put $500,000 (principal and interest) into it and OWN it at the end of 30 years or I can rent, pay the same amount over that 30 years (or more, considering rent inflation) and own NOTHING…absolutley NOTHING. My expenditures renting a similar property would possibly be fractionaly lower but I would get nothing from this after those 30 years. Oh wait, the landlord (i.e. the renter’s “banker”) may say thank you and hopefully would give back your deposit. Why does no one make this arguement agains those who seemingly hate homeowners, the housing industry, etc.? Am I wrong in all my assumptions.
And finally, you mentioned new products coming out that are more “creative”. I agree that in general the current requirements that we see are needed and appropriate and serve to keep the industry stable. But I also believe there is a huge unmet demand for self-employed individuals who are great lending risks and have proven in all other aspects of their life to be so. Every part of their file would currently be considered rock solid except for they don’t have a traditional employer. Will that product come back and/or are their existing products that meet that demand with reasonable requirements?
Regards,
Hello and thanks for the post.
Wasn’t that a fun condition, verifying the deposit. The frustration part for us is when they hold up a transaction for a condition that common sense would give you the answer in one second. I could make a article of just the craziest conditions I have seen. Also, each bank has their own way of looking at what Freddie, Fannie and FHA want which makes matters worst.
To answer your question on your purchase. I wrote an article a few months ago on the buy vs rent question http://www.benzinga.com/news/financing/11/05/1088401/the-modern-2011-riddle-of-the-sphinx-to-rent-or-buy I never liked that question because it’s impossible to make that a generalization argument for the masses. However, each family or individual really needs to look at their own financial situation to make that choice. One important item for sure is that this will be the last time this century where long term money is cheap. We might not even have 30 years mortgages 10 years from now. So, taking a look from what you told me I believe it was a good choice on your home purchase. 5 years from now you could easily be paying 7,8,9 percent or even higher interest rates on your future home. Even if your home doesn’t ever go up in value, you still at some point will had a equity building asset for your own personal balance sheet.
To answer your other question. Our company here in Orange county CA, a good portion of our clients were self employed. So, I really do understand where you’re coming from in regards to that. My self employed clients were very strong financially. Maybe some day they will bring something back for the self employed clients. I believe if you see anything in that manner it would have to come from the private sector only and when the economy is much more stable. I do speak to financial advisor’s that work for certain members of congress on future housing bills. The talk of helping self employed borrowers never comes up really.