Banks, Lending, and the Economy

I can’t pretend to be fluent in economics, but I have something to share which I hope you will find useful.  My position as a director of the Haywood Home Builder’s Association allows me the privilege of learning about such matters.

Our organization received a letter from one of our members, a building contractor.  He stated in his opinion the only way the construction industry can make a “come back” is for the banks to change what they are doing and to become more lenient in their current lending practices. 

One of my fellow board members is a banker.  She addressed the contents of the letter in our meeting, and I asked her to write her response and send it to me so that I might glean a better understanding of the situation.  She was kind enough to do just that, and I would like to provide for you here the body of her essay.

  • First of all “spec” lending has basically halted.  The reason for this is “spec” lending is considered “risky” because these loans are for properties no one initially plans on living in and only for the main purpose of selling the home in the future.  The issue now is that these homes are not selling, especially the higher-end homes.  The builder cannot afford to keep these homes for an indefinite period of time (hoping it will sell) and the bank has to take it back in foreclosure.  Unfortunately, there are more of these situations than we would like to talk about in the market right now.  The risk is — if that builder had a choice as to what payment he was going to make – the difference between paying his own house payment where his family resides and the home that he built to sell, he is always going to choose the payment on the home where his family resides, as well he should.
  • The de-regulation of banks in the past years made our guidelines so lax that every Tom, Dick, and Harry in the country thought they could originate loans and loans were made just to make money without any thought to the borrower.  Could the borrower really afford the home, did they understand the loan program, was the appraisal a true picture of the value of the home—all questions that contributed to the current problems.  I honestly believe mortgage originators being paid on a commission basis have been our biggest source of current problems because they only got paid if the loan closed.
  • Credit scores.  The score considered “good” is now at least in the 700s.  Two years ago, credit scores could be as low as 640 and considered good but with all of the foreclosures, the grade level has definitely increased.  However, there is a caveat to that statement.  (My Bank) makes both brokered loans and portfolio loans.  If we have a good customer who has great compensating factors, such as good deposits, low loan-to-value,  etc., we may choose to consider these factors and they may out-weigh the lower scores.  Currently, (my bank) has no fixed rate loans over a ten year period and therefore, these portfolio loans would be made as an adjustable rate loan.  If the customer is trying for a fixed-rate brokered loan, the credit scores have no compensating factors.
  • Appraisals.  One of the biggest problems with foreclosures in the nation is the loan balances exceed the actual value of the home.  Unfortunately, there were instances that the mortgage originator, the realtor, the seller or someone involved in the transaction actually got appraisers to inflate the values, just to make the loans.  That has been the biggest reason for the upside down loans.  On March 1, 2009, the federal government passed the HVCC (Home Value Code of Conduct) resolution.  As of that date, no party involved in a real estate transaction (buyer, seller, builder, realtor, loan officer, attorney) can be involved in the ordering of an appraisal.  It now has to be done by a non-interested third party.  We, as originators, do not have any idea who is performing the appraisal until we have received it.
  • Lastly, the issue concerning problems with “higher-end” homes has mainly been the appraisal process because the sale of these homes has almost stopped.  The appraisers have no way to compare the subject property with current sales when there have been no sales.  In the past few months, as indicated in the Realtor newsletter and the paper, sales have picked up.  This also has been a problem because some of those sales have been stressed sales and the prices definitely do not indicate the true value of the homes.  This is also hurting the appraisals because the appraisers again only have the current comps to compare the subject property to.

May the reader find this essay to be as informative as I have.  I will gladly provide the name of the bank and the lending officer to any interested party.  Please comment or email me at ab@andybaileydesign.com

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