The joke around mortgage lender offices in recent times was that anyone who could fog a mirror could qualify for a mortgage. But since the financial meltdown last fall, the mortgage market has changed, forcing lenders to tighten up standards—a practice that many say came too late in the game.
Obtaining credit was just too easy, and the results are before us now. Utah’s mortgage default rate is rising, and residential real estate sales have slowed as mortgage bankers tighten their lending standards, which now go well beyond the fogged mirror test.
“When people won’t buy mortgage-backed securities, it trickles down to the person who wants a mortgage,” says Jeremy Plouzek of Mortgage Consulting in Provo. In the superheated housing market that existed nationwide for most of this decade, NINJA loans—No Income, No Job and No Assets—were pumping trillions of dollars into home loans for most everyone, regardless of their credit history. Lenders didn’t worry because the housing boom pushed real estate prices ever higher, assuring them of an appreciated asset if they ever did have to foreclose.
Today’s global economy now shows how foolish those assumptions were. In reality, real estate prices stopped appreciating as low teaser loan rates reset, foreclosures mounted and homeowners lost their jobs in the current recession. Those once-valuable homes, and the mortgage-backed securities behind them, were packaged into what turned out to be “toxic assets” on the balance sheets of failing financial institutions.
In Utah, the aggressive mortgage lenders are now gone and Plouzek says surviving lenders are in good shape. “What’s changed is we’re calling your bluff on income and assets now,” he says.
Lenders today are looking more closely at the loan files. Now, instead of simply stating income and assets, applicants have to prove them, and prove they can handle the debt. “Credit scores do need to be higher,” reports Glen Ogden of The Mortgage Co-op, a Mountain America Credit Union subsidiary that wholesales mortgages to brokers. “And now we want paper documentation.”
How much documentation? And what kind of credit? Lenders are going back to the standards of not so long ago: two pay stubs from the past two pay periods, two years of tax returns, fairly clean credit with no history of late payments and credit scores in the 600s or higher. “Less people qualify now,” reports Tracey Rumsey of Bountiful’s Home Loan Corporation. “Money is still flowing, they’re just more selective in who they’ll give it to.”
You might think part of that selectivity involves higher down payments, and there is some tightening there, but lenders still can find low or no-down programs for certain buyers. Lenders say FHA loans can still be written with as little as 3 percent down. And, the Utah Housing Program for first time buyers still can write mortgages at 100 percent. “If you’re a first time buyer you’re in the cat-bird seat—rates and prices are down and you can still buy with zero down,” says Republic Mortgages’ Gary Nielson, who is also president of the Utah Mortgage Lender’s Association.
Real estate agents are providing more coaching to their clients about the new realities—which six years ago were the “old” realities. “The money is there, but you have to be Mr. Clean to get it,” agent Todd Pixton of ReMax Metro observes. “When you go to the bank you have to be cleaner than a year ago. You can’t have too many dings on your credit. Assuming you are credit worthy, there’s plenty of money to borrow.”
Lending Alive and Well?
That’s the news lenders want to spread out. Money is available and still flowing—just not to all the speculators, house flippers and those unqualified borrowers who were talked into loans that were way over their heads. With all the coverage of foreclosures and talk of credit freezes, many potential buyers who want to take out mortgages aren’t trying.
Realtor Ben Thorne of Prudential Utah Real Estate sees it frequently. “People are scared. The media made it like it was a bad thing to buy a home. People are watching too much TV!” Many other real estate professionals feel that people should turn the TV news off, ignore the headlines and try to think their financial futures through more rationally.
If they did, they might find one price trend changing the equation. As more Utahns lose their homes, or stay out of the real estate market for fear that it is not at its bottom, the demand for rental units is going up. Simultaneously, the Federal Reserve is printing money by the billions, making it available for lending at bargain rates. The two forces have narrowed the gap between the cost of paying rent and the cost of borrowing and making an investment in real estate.
“The money’s still there,” reports Rumsay. “If you’ve got good credit—not absolutely perfect credit—there are still good options for you. You feel bad because a lot of people think it’s too hard to borrow money now.”
“Rates are falling, they’re the lowest since I’ve been around,” says Zions Bank executive vice president George Hoffman, who oversees mortgage lending. The bank never embraced NINJA lending and did not get burned. “The good thing we’re seeing with our paper is it’s all performing.” The bank is still ready and willing to lend but not seeing a lot of applicants. “There are not a lot of buyers,” Hoffman says. “Everybody is waiting to see where the bottom is.”
In real estate sales offices, that means the phones aren’t ringing. Many of the newer agents have left the business. The weeding out of sales agents is a cyclical fact of life in real estate. Those who joined in the boom times don’t know how to survive the lean times. “Inexperienced agents are not able to do the business,” says Ben Thorne, veteran Prudential agent. “What they didn’t realize is not every buyer buys when you put them in the car. We had two years of that, but now it’s more business as usual.”
That means agents are working harder and making fewer sales at lower prices and lower commissions. “A lot of houses are on the market and they’re not selling,” says Rosalie Livingston, a Prudential agent who adds, “I find I’m not doing as well.”
Thorne knows the fear in buyers’ minds now—the fear that Utah is not yet at the bottom of the market cycle. “Buyers are fearful of getting in the market and having values drop lower—fearful buyers don’t buy.” But Thorne and fellow agents continue to make the case that there’s never been a better buyer’s market. “We’re not doing great, but we’re not in the crapper like neighboring states.”
Susie Martindale, principal broker for ReMax Masters, is still putting potential buyers in homes—but they are buyers who know they’re in control of the transaction. “I’m seeing very low offers and buyers not willing to negotiate. Sellers want to and are willing to sell, but once they get a lowball offer, its difficult to work with them.” She’s seen potential sellers get insulted at lowball offers and reject them, only to call back later asking if there’s any hope to revive the deal.
From October 2007 to October 2008, Utah foreclosures rose 73 percent, and Utah rose to 13th in the nation in the ratio of foreclosures to performing loans. That’s nothing to brag about, but it beats neighboring states like Nev., Ariz. and Calif., which are leading the charge on foreclosures.
In Utah, foreclosures affect not just the homeowner and his or her lender, but everyone owning or looking to buy a home. Building permits have fallen off the cliff as homebuilders realize there is no market for new product with nearly new homes frequently involved in foreclosure and sold off at discounted prices. Utah’s new home construction sector is extremely weak, reports Zions Bank economist Jeff Thredgold. “Housing starts within Utah are at their lowest level since the early 1990s,” he reports, adding that 15,000 construction jobs have disappeared in Utah in the past 12 months.
And foreclosed properties on the market bring down the prices for everyone else on the block who may also want to sell. It all makes for this being a lousy time to sell, but a fabulous time to buy.
Better Days Ahead
So many market forces are converging to create a once-in-a-lifetime buying opportunity that those in the real estate business are having a hard time understanding why there aren’t more potential buyers keeping them busy. Rising rents, falling interest rates, tremendous inventory, available mortgage money, short sale and foreclosed property opportunities and often desperate sellers should be creating the perfect storm for real estate investors and young families looking to buy their first home.
“If you have credit and any form of a down payment it’s a great time to borrow money—there’s a lot of cash sitting around,” says mortgage wholesaler Glen Ogden. “If you’re a good borrower, it’s the right time to be in the market.”
In the real estate business, agents always see light at the end of the tunnel, and they usually see it about now, as winter’s grip loosens and spring is around the corner. “If rates continue to go down, hopefully the inventory will go down,” says Susie Martindale. “We hope to have a lot of sales in the spring.”
The sales will likely be liveliest in the lower-priced end of the market. Seventy-five percent of home sales in Salt Lake County are priced under $300,000—the homes young families and first time buyers look for. These are the homes renters with good credit can get into now. The more difficult segment of the market is at the higher end. “The market from $175,000 to $300,000 is still very strong,” Republic’s Gary Nielson says. “Properties above $500,000—it’s still tough to see the values there. I see a lot of folks with $800,000 homes now appraising at $600,000.”
But at the lower end of the spectrum, Nielson marvels at the opportunities. “I think it’s a great time to be buying.”
In the meantime, this painful period may well be part of the solution. The opportunistic real estate agents are gone. The speculators and flippers are gone. The unethical lenders willing to give anyone money are gone. The harmful loan programs that winked at “stated incomes” are gone. Those who bought inflated homes in the past two years may be stuck for several years while prices catch back up, but those in the market today with good credit and realistic expectations should find the means to get into the home they’ve always dreamed about.
It is, mortgage banker Nielson says, “A cleansing that will be painful for some, but good for everybody in the long run.”