Securing a Loan Gets Tougher

May 26, 2007

The Wall Street Journal, this past week, published an article entitled “Securing a Loan Gets Tougher as Lenders Tighten Standards”. The opening two paragraphs are as follows:

Mortgage lenders are beginning to scrutinize borrowers more closely, causing some loan applicants, even those with good credit, to face higher costs and more hassles.

As the number of delinquent mortgages climbs, lenders have tightened their standards for issuing loans, including such well-publicized moves as raising minimum credit scores and cutting back on 100% financing and low-documentation loans. Now, some lenders are probing more intently would-be borrowers’ finances. They are taking a tougher look at how much the property a borrower wants to buy is worth. They are peering further into clients’ pasts for credit problems and requiring more in-depth reviews of borrowers who say they are self-employed. Some lenders are taking a harder stance when it comes to whose credit score a couple can use when applying for a mortgage, rather than simply allowing them to use the higher of the two scores.

A few days ago, I had a conversation, via email, on this very topic with a friend of mine who is a mortgage broker in Miami. One of my earlier blogs entitled “Vue at Brickell – Overpriced or Insanely Overpriced?” was what initiated this conversation. A few of his comments are below:

So you know, most lenders will not do anymore loans in Brickell, especially on investor stuff. All of the new buildings will have problems in the next few years. There was just so much fraud there.

My Opinion: 99% of lenders these days will only lend on the last MLS price, not the appraisal like they did in these cases. Also in Brickell they will do appraisal reviews and BPO’s to be sure on any borrower with less than stellar credit and a 20% down-payment. The cash back deals are still occurring, and the fraud line is getting blurred. So you know the current state of things, if the borrower is being approved by the lender on the MLS price, and they are not falsifying any of the loan criteria that makes them “approved” by the lender for the transaction then there is no fraud. Even if the seller decides to give some cash back to the borrower -typically structured to a third party company (aka the borrower), this is technically not illegal, because the cash back did not affect the underwriters decisions and the borrower was truly qualified and the price was justified by the MLS (market) and the appraisal. So what is occurring is sellers are giving cash to the borrower after the sale, which legally they are allowed to do. Gray area of the law -Yes, and this is occurring rampantly today. There are hundreds of investor buyers – maybe they learn from some info-mercial somewhere about this – I don’t know- but I am called every month from new clients with these “legal” deals. In my opinion the Developers are in the fray on this type of deal with leasebacks, mortgages ad to pay your bills for up to 2 years and cash back at closings this “legal” way. What you will find is this type of thing is “propping up” the market in the short term and creating false market conditions due to buyers paying more in expectation of a large cash back to financially carry the property – or receiving their “profits” on the front end and leaving town or the country. My forecast, is that the lenders will begin to audit buyers and especially the 1 payment default foreclosures for this type of dealing and press the state of Florida to amend laws and prevent this type of dealing. Today its a loophole, I foresee in a year after the scams take their toll, this will also be an issue in the news and another result in excessive foreclosures.

This is very bad news for investors who bought preconstruction condominiums in some of these buildings that are due for completion in the next two years. Many have feared that a large percentage of these investors will be unable to close on their condo units due to the financial burden of having an extra mortgage. Now, if banks are unwilling to underwrite investment loans, there becomes a fear that people will be unable to close because financing will be unobtainable. People will have no choice but to walk away from their deposits, which in most cases amounts to 10%-20% of the purchase price. Developers will have no choice but to offer significant incentives or slash their prices on the remaining condo units in their inventory that were unable to close. Either action will likely bring down prices in surrounding buildings and have a negative impact on the entire real estate market of that neighborhood.