Lenders Torpedo Home Sales

Written by: Steve Cook   Sun, November 15, 2009 Beyond Today's News, Crisis Watch

While the Federal government will be paying out nearly $17 billion in tax credits over the next five months to stimulate home buying, the nation’s system of mortgage finance is undermining their ability to get financing. 

In California this year, nearly one out of five homes was purchased completely with cash, 19 .7 percent, a 78 percent increase over 2005 even though nearly half the sales in that state were to first-time buyers, who generally have a harder time coming up with cash than repeat buyers, according to data from the California Association of Realtors.  The incredible numbers of California buyers who are scraping together the cash are doing so not because they have no better uses for their money but because the system of mortgage finance is failing them.

Buyers of all types are complaining about the difficulties they face getting financing from lenders with standards that change, documentation requirements that seem excessive, problems with appraisals in the wake of the controversial Home Valuation Code of Conduct, slow response and rates that change between those quoted when they quality and when they close.  Of the sales that fell through last year in California, the buyer’s failure get financing was the leading cause, responsible for 40.5 percent of failed closings.

Even those who manage to buy a house have tales to tell about the trials they faced getting financing.  The National Association of Realtors’ annual profile of home buyers and sellers released Friday in San Diego found that 12 percent of buyers said financing their first home was more difficult than expected.  Thirteen percent of successful buyers said they had experienced a purchase agreement that was canceled, terminated or fell through; and 8 percent had been rejected by a lender. “This raises the question of how many potential buyers were unsuccessful because of problems with appraisals or loan qualifications,” said Paul Bishop, NAR vice president of research.  ”The market would be even stronger without these problems.”

NAR found that home buyers continue to experience considerable difficulty in obtaining financing. On a scale of “1″ to “10″, with “1″ being “very easy” to obtain financing and “10″ being “very difficult”, home buyers reported a high average level of difficulty in obtaining finance of 8.1.  In California, CAR found that buyers’ level of difficulty obtaining financing is 9 out of 10.   A June survey by Move, the company that operates REALTOR.com, found that 15.4 percent of potential buyers have a hard time getting financing to buy a home.  Three years after the subprime loan meltdown touched off the housing recession, one out of every four banks continued to tighten lending standards and terms for prime mortgages in the third quarter, making it more difficult for buyers to qualify for and close on financing.

Near term prospects for buyers aren’t encouraging.  The number of banks tightening prime standards slightly increased during the third quarter according to tthe latest survey of survey of senior loan officers by the Federal Reserve.  A survey of 2501 consumers in August by the Bank Administration Institute found that  nearly one-third - or 31% - indicated access to mortgages is worse now than six months ago, while only 5% said access has improved. The projections indicate 12 percent of respondents expect access to improve in the next six months, while 15 percent expect access to worsen.

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