Real Estate and Business

October 26, 2010

Hatteras Island Real Estate:
What’s going on with lenders?

By TOM HRANICKA

For the past several years when asked about the availability of funding for residential transactions, I have responded with something like “underwriting standards have become stricter across the spectrum of loans, but financing is readily available for qualified buyers for loan amounts of $417,000 or less.”

As much as I hate to admit it, I think I may have been too easy on the lenders. Then again, the lenders may simply be reacting to the dysfunctional regulatory environment within which they find themselves operating. Whatever the cause, the reality is that regardless of a borrower’s financial qualifications, the path to getting a loan these days can be a long, hard, nerve-racking process.

As I understand the situation, these are some of the factors influencing the loan approval gauntlet that buyers are facing:

One of the main issues is that the capital requirements for banks have increased, limiting their ability and their desire to lend. The politicians have insisted that banks build up substantial reserves in response to the risky lending practices of the past.
Some government regulations actually penalize banks for making loans and reward them for holding cash and Treasury bonds.
Underwriting rules have become increasingly detailed and rigid, leaving little room for personal discretion by the loan evaluators.
Regulatory oversight has become so pervasive that mortgage lenders virtually have a federal watchdog in their offices looking over their shoulders. If the lender makes a mistake, they may have to buy back the loan, substantially reducing their profit on other loans.
According to one national finance expert, Fannie Mae and Freddie Mac have made it increasingly difficult for potential borrowers to qualify for loans, and they have reduced the number of those who qualify for the best interest rates.
Self-employed individuals are facing an especially difficult underwriting process because of the challenges they face meeting income documentation requirements relative to the loans they are seeking.
Long-standing, established relationships that borrowers have had with lenders do not make the underwriting process easier, and there is no assurance that their loan will be approved.
Reduced property values mean that some homeowners may not be able to demonstrate that they have 20 percent equity in their homes to qualify for refinancing.
Because there are so many distressed property sales in the market, appraisers often have to use these transactions as the comparable standard in their determinations of value.

To get a loan today, a borrower must produce a profile that essentially presents no risk to the lender. I am certainly not advocating a return to the days of irresponsible underwriting and exotic loan products. However, I do think that the pendulum has swung too far away from reasonable underwriting practices. A recent Reuters’ article described in detail the hurdles that borrowers are encountering. You may find this article very informative reading at http://tinyurl.com/2ehaz48.

I definitely do not want to leave you with the impression that buyers can’t get loans for the properties that they plan to purchase or that sellers want to refinance. Quite the contrary. There is a lot of money out there, and the vast majority of loans are ultimately approved. Actually, there couldn’t be a much better time to buy with both prices and interest rates at very low levels. The point that I want to make is that the loan process is no longer as simple and as streamlined as it used to be.

If I could offer just one suggestion that might make your loan experience less stressful, it would be to use a local lender. They know the market, and they have established relationships with their companies’ underwriters.

To gain a realistic and balanced understanding of the loan application process, I encourage you to contact one of our Hatteras Island Realtors. Being armed with factual information and determining the best lender for your personal transaction before you enter the loan process can go a long way to making your financing experience more enjoyable.

(Tom Hranicka is an associate broker with Outer Beaches Realty. Questions, comments, or suggestions for future articles may be sent to Tom Hranicka at P.O. Box 237, Avon, NC 27915, or e-mail to hranicka@hatterasisland.com )

Copyright©2010 Tom & Louise Hranicka. All rights reserved.