Jackie is one of the top real estate brokers in New York City. Her team sells tens of millions of dollars worth of property every year.
And yet, she hasn’t escaped the effects of the housing crisis. Like many agents across the country, she’s frustrated by the new world of mortgage finance.
Last week, Jackie relayed the story of a client who had a “dry” closing, one where the paperwork is signed but the cash transfers later, usually the next day. Dry closings are a fairly ordinary process, and they happen fairly frequently and for any number of reasons. You can think of a dry closing as a time in which you have done everything necessary to close a transaction or closing settlement but for one or two items. In some cases, a dry closing can wait for the lender to finance a transaction. In another case, a buyer still needs to satisfy something with the lender. And in another, the seller might have to resolve an issue before a buyer can close. In any of these cases, a dry closing holds the closing open for several hours or overnight until the issue is resolved and the parties can proceed to close or settle the real estate closing.
Except that this time, after the paperwork was signed, the lender came back the next day and said that something had “changed” overnight and refused to fund the loan. Not only that, the lender refused to explain what happened.
That is much more unusual. Unfortunately, lenders are behaving in ways that don’t make a whole lot of sense.
The new world of mortgage finance appears incomprehensible and illogical to real estate agents, brokers, buyers and sellers. Nothing makes a whole lot of sense, especially since the pendulum has swung so far in the opposite direction.
Sure, everyone now knows it was a really bad idea to allow anyone with a pulse to borrow ten times their gross annual income, no matter what their credit score.
But there are new rules that have been introduced, and old rules that are now being enforced, that are throwing everyone for a loop and making it very difficult to get deals done.
Recently, I got a call from a listener to my radio talk show, who said he was rejected for a loan not because he paid a utility bill late. The lender told him that because he paid the bill a week or two later than he normally paid it, it looked like he was having money troubles.
Even folks who work in the mortgage industry are confused by why some deals get approved and others don’t. A mortgage banker shared that in February, 75 percent of the deals he put forward were rejected by the bank. These were deals that should have easily been approved, and even the mortgage banker wasn’t sure why they were turned down.
The challenge of a new world of mortgage finance is that it disrupts the status quo and makes it difficult for real estate to get back to business.
Some of the stumbling blocks include:
- Many condo and co-op buildings have no idea that they have to be “approved” by Fannie Mae, Freddie Mac and FHA or buyers will not be able to get loans. Since Fannie Mae, Freddie Mac and FHA now account for more than 90 percent of all mortgage loans, sellers who live in condos that aren’t approved will be totally out of luck. (For Fannie Mae and Freddie Mac, the approval process can be rather simple and the lender may only need to review the condominium documents and financial statements to approve a deal. But for FHA deals, the process of being approved by FHA can be rather lengthy and complicated.)
- Buyers don’t realize that the minimum credit scores needed to get approved have gone up dramatically, even for FHA loans. In addition, minimum down payments and cash reserve requirements have risen, and some buyers are unprepared for the level of cash required.
- Agents complain that they have no idea where appraisals will come in, throwing a wrench into real estate deals late in the game. Top brokers are telling me that instead of a financing contingency, they’re writing appraisal contingencies that state that the buyer will get the good faith deposit back if the property does not appraise out in value.
- Short sales continue to take months to get approved. By the time the lender approves the deal, some buyers have moved on.
Foreclosures are easier to work with, but some lenders aren’t discharging all liens in the process. One attorney shared that a tax lien mysteriously appeared the day before the closing, upending an entire deal.
Of course, having a functioning, well-oiled mortgage marketplace is something the real estate industry has taken for granted for decades.
The idea that we’re in new territory, with new rules and regulations, will take awhile to get used to – if we ever do stop pining for the way we were.