According to the most recent U.S. Pending Home Sale Index, fewer Americans than forecast signed purchase contracts for existing homes in September. The index was down 5.6 percent; the biggest drop in more than three years.
“This tells us to expect lower home sales for the fourth quarter, with a flat trend going into 2014,” NAR Chief Economist Lawrence Yum said in a statement.
The news shouldn’t have been a surprise to my weekly readers. Our local real estate market has been cooling since August and several of my columns have discussed the relevant issues and their implications to buyers and sellers. However, this large drop in national sales is of significance. The slump is more than a seasonal adjustment. If it continues it could curtail the housing market’s recovery and slow the pace of our economic recovery.
The sales slump caught most national housing economist off guard. Now they are scrambling to identify the culprits disrupting what was expected to be a steady sustained housing recovery. The list will include: the bump in interest rates, higher home prices, fatigued buyers who tired of competing with cash buyers and multiple offers and then there was the government shutdown. All those factors are contributing to a bumpy recovery. Absent from the list of easily identified influences is another culprit that has already been a drag on home sales … banks.
Mainstream economists and the media often give a pass to lenders as being an obstacle in the housing market’s recovery. While the loan origination process is a pretty easy concept to grasp, the banks internal workings of underwriting, securitization and secondary marketing is not. Pointing to an increase in mortgage rates as the reason for slower September sales is an easier concept to explain than the systematic tightening of credit policies designed to discourage borrowers from applying for a mortgage.
Back in the day, lenders generated huge profits on originating and servicing mortgage loans that they securitized and sold off to Wall Street investors. The emphasis was to approve as many loans as possible. No one is advocating a return to the reckless lending policies of the past but the pendulum has swung too far in the other direction. Banks no longer look at their mortgage origination as profitable. It actually cost lenders $1,750 for every purchase loan they process and $950 for every refinance. Their credit card divisions generate more profit with less risk. Servicing mortgages has also become more costly. Lenders have had to hire thousands of new employees to service their loan portfolios and to comply with new state and federal regulations.
Not only are lenders losing money with every loan they process, they incur a higher degree of risk on the loans they approve. Fannie Mae, which securitizes loans and investors who eventually purchase them, is forcing lenders to buy back loans that go into default. These “put-backs” are often disagreements over small mistakes that bear little relation to either credit risks or the subsequent default. The result is it takes longer to underwrite a loan and lenders are putting in place additional underwriting standards that go way beyond Fannie or FHA guidelines. According to the Mortgage Bankers Association, the typical loan underwriter will work on 50 files a month. This compares with 200 a month a few years ago. The excessive time and documentation is turning off many borrowers from even attempting the process.
After what the banks have been through, it’s natural they have an aversion for taking on the risk of making unprofitable mortgage loans. The foreclosure crisis impacted everyone but lenders got slammed the worst with increased federal and state banking regulations, billions of dollars lost on their property foreclosures and billions more paid to settle state and federal claims for often procedural miss-steps. Now with federal regulators permanently stationed inside banking headquarters and activists state attorney generals looking for more “deep pocket” opportunities, banks have adopted a defensive loan posture. Rather than viewing a new loan as a profit opportunity, banks now view every loan as a potential liability. And while no CEO has come out and said we’re really not interested in making new loans, their collective aversion to taking on any risk of default, consumer litigation or inadvertent violations of a new federal or state regulation is clear by the number of loans they decline.
According to data released this last month by the Federal Financial Institutions Examination Council and published in the Wall Street Journal, banks are rejecting mortgage applicants at increasing levels. J.P. Morgan Chase turns down 33 percent of mortgage applicants, while Bank of America rejects 25 percent, Wells Fargo 21 percent and U.S. Bank 17 percent. Based upon these rejection rates, it would appear that many applicants simply are not credit worthy. Not so!
Loan applicants applying for a mortgage today have an average credit score 50 points higher than prior to 2008. These higher scores are actually understated since they were earned during a much more difficult economic environment than credit earned during the more prosperous early 2000s.
According to Mark Zendi, chief economist of Moody’s Analytics, “Easing lending standards to return credit scores to pre-bubble levels would boost home sales by 450,000 units and new single family home construction by 275,000 units.”
The recent housing recovery is encouraging and much of our economy is dependent upon it continuing. The recovery, however, will be more difficult and protracted as long as lenders and policy makers continue to discourage borrowers from applying for a loan.
Ken Calhoon is a real estate broker in El Dorado County. He can be reached at www.kencalhoon.com