The Hamptons Dodges The Mortgage Bullet

By Daniel Simone

Recently, the media have been littered with dismal reports about a depressed real estate market. Statistical findings of raging foreclosures, mortgage companies' dissolutions, banks retrenching from the home lending business, interest rates spiraling upward and an assortment of other dark economic prophecies has been disseminated. Also, there has been circulation of the speculation about the "balloon that is going to burst," which only serves to generate gloomy psychological perceptions. This rumor has been pervading over the past 60 years, but to date, the real estate balloon still hasn't burst, and probably never will.

About 6 years ago, the mortgage banking industry erupted with optimism and deployed an aggressive effort to promote residential loans. It provided a variety of mortgage arrangements that afforded a homebuyer the capability to purchase a primary or secondary residence that previously might not have been within his or her financial level. By 2002, the lenders were swirling in an unprecedented euphoric state. Over-leveraged home loans were granted to unqualified borrowers through creative financing programs that were liberal and perhaps even preposterous. Mortgage bankers, by reason of a temporary lapse of rationality, fell into an optimistic trap, lending up to 100% of the value of a property. Further to these incomprehensible terms, lenders even permitted homebuyers to finance an additional 6% by adding a seller's concession to the purchase cost of residential properties. A seller's concession, mathematically, creates the following scenario: If the property is being sold for $500,000, the selling price listed on the purchase contract is increased by 6%, in this example by $30,000. Therefore, on paper the total acquisition cost is $530,000. At the conclusion of the transaction, the seller gives the buyer a concession of $30,000. The loan, however, is based on the contractual price of $530,000. So in essence, the purchaser not only doesn't lay out any cash, but also walks out of the closing with $30,000 in hand. When all is said and done, the homebuyer has financed 106% of the selling price.

Over the past six months, innumerable mortgage bankers have gone out business or liquidated their home loan portfolios. Those who have remained solvent have shed their rising and liberal mode, and revised their terms and policies to reflect a prudent and less aggressive approach - rationality. When contacted by this writer, most of the representatives of the defunct lenders declined an interview. The mortgage companies that survived seemed to be more willing to discuss their present state of affairs. "Last month my clients, a young couple, were buying a home in Amagansett on Cross Highway, just south of Route 27. The selling price was $ 2.4 million and they were all set and ready to close on a $2.2 million mortgage. On the eleventh hour the bank got nervous and requested an additional 10% down. The buyers loved the house and thought it was a bargain but for whatever reason didn't want to go for the additional 10%," explained Liz Brillantino, a Senior Loan Officer at Custom Capital Inc. "Although this case is an unusual one, it has been happening lately. Fortunately, it is not too frequent in the Hamptons."

Enzo Morabito, Director of Real Estate Development at Prudential Douglas Elliman in Bridgehampton, advanced encouraging and sensible comments. "Whatever problems the mortgage industry is going through has little or no effect out here in the Hamptons and the North Fork." Fundamentally, one of the top Sales Representatives of The Corcoran Group's Amagansett office, Jim McMillan, concurred. "I had several clients come out here over the weekend and they're beginning to realize that there isn't going to be any balloon burst." When Mr. McMillan was asked if he thought the mortgage crisis bears a significant paralysis on the real estate market, his response echoed that of other East End brokers. "Not out here. Most buyers I encounter never plunk down less than 30-40% as a down payment. In fact, most buyers of homes above $1.75 million buy for cash. The biggest problem, as I see it, is that all the negative talk in the papers has been causing a psychological barrier."

Mr. Morabito added another interesting observation. "There's no doubt that over the past fifteen months we've gone through a dormant period in residential real estate out here. But in actuality, it has sifted out the over leveraged speculators, and all those people who saw an opportunity to afford a home in the Hamptons that they could not afford otherwise. Now the prices have adjusted to what they should've been in the first place, and that's why the intelligent home shopper is recognizing the good values and beginning to buy before the prices soar again."

The mortgage banking industry, by imprudent and overoptimistic real estate projections, or perhaps, also clouded by a smidgen of greed, is the causation of its own blood bath. Thankfully, as some of our local industry experts have expounded on this matter, the Hamptons and the North Fork will not be in the way of the banks' foreclosures wrecking ball.

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