Dan's Papers - April 10, 2009

In an ongoing exploration of the ways real estate transactions are more fragile than ever, we explore the problems created by mortgage application and approval. All of a sudden, the new problem seems to be securing the all-important mortgage. Every night, on most news broadcasts, the term "tight money" is used. Those buying or selling homes today are learning just what that means as they watch deals slip into the abyss waiting for the due diligence of the new mortgage reality.

Melissa Cohn, founder of Manhattan Mortgage, gave her insights on the present mortgage climate, saying, "There are new lenders entering the marketplace, helping to make more opportunities available to people looking to purchase or refinance. There are still a few lenders doing no income verification, a big help to the self-employed," she noted.

Notice she used the words "a few," when at one time everyone was offering no income verification. What is happening now seems to be that qualified buyers are applying for mortgages and locking in great low rates. Then the nightmare begins, with the mortgage companies going full circle in the form of due diligence. Monkey wrenches are being thrown into deals.

It was only two and a half years ago that a bartender friend of mine got a $500K mortgage while he was on unemployment. (By the way, he's still making the payments, but can't refinance because now he needs income numbers he cannot even come close to submitting for approval of a much lower rate mortgage, yet he is paying his present mortgage regularly, at the higher rate.) The banks seem to be having problems pulling the trigger for final approval. They are not rejecting applications, just stalling them and in that lies the problem of stagnation for the buyer of the home, the seller of the home, the real estate agent and even the mortgage broker.

One insider stated, "There seems to be a strategy of banks at the moment to hold on to as much capital as possible just because it is the nature of banks to do that when things get tough."

Banks are gun shy when it comes to taking reasonable risks because quite frankly, not too long ago, they were not doing due diligence and were in effect not only taking risks, but writing "suicide mortgages" - ones which taken in whole almost caused the U.S. banking system to implode. There are stories of high net value clients, those who work for financial institutions, whose 2008 income numbers were in the tank compared to other years and are having their final approval stalled or even denied based on huge decreases in income. With the present bonus fiascos practically making Wall Street bonuses prohibited by institutions that have taken Federal bailout money, the future of verification is murkier. And make no mistake, tempers are flaring when people who consider themselves extremely successful are being told, "Sorry, we need to look over your income numbers more closely," or are being asked the painful question, "Why did your income go down $3 million dollars in 2008?"

There is one deal pending for a sale of a home in East Hampton where the buyer was approved but the bank just won't write the mortgage, and has everybody on hold. Every week the mortgage broker, the buyer, the seller and the real estate agent are poised for action, but the bank is just stalling.

But there is good news concerning mortgages, according to Cohn. She points out, "We are anxiously awaiting the increase in the conforming limit to $729,250, making more affordable rates available for bigger loan amounts. This will help get the market moving. We're seeing more activity in people seeking pre-approvals, a sign of life in the Hamptons market." Keep in mind that even though $729K is the new limit, a higher interest rate kicks in when you get above $417K.

The days of getting a non-verifiable loan for 110% of the value of the home are over, and looking back at the results of what those loans did to the world banking system, perhaps that's a good thing.

[Ed. Note: Because this is such a huge topic, we'll continue the mortgage discussion next week with tips an information geared to buyers and sellers.