I read an interesting article today put out by RISMedia, heavily loaded with quotes from Lawrence Yun, the Chief Economist for the National Association of Realtors (read it for yourself here). He had some very valid points about current lending standards and the challenges borrowers faced when applying for mortgages. He quoted historical data on default rates from the last decade as compared to during the boom, bust and even from a segment post 2009. While the primary argument was that standards are too restrictive, based on an applicant's FICO score, I think there is more to it.
Simply put, I think underwriters and those creating guidelines are suffering from a lack of common sense. Yes, I realize it sounds simplistic, but I've seen a number of situations over the last year that would indicate this. I've seen listings with property conditions that I personally wouldn't be comfortable selling to anyone get passed over by appraisers and underwriters AND values so far off base (high or low) that I'm not even sure I could rationalize a supposedly educated person could draw the conclusion. I've honestly seen borrowers so overqualified for financing, almost get denied despite high paying jobs & credit scores. On the other hand, I've seen situations of borrowers sailing right through the approval process where the writing on the wall was fairly evident to me that they would default. Lastly, I've seen mortgages that I don't believe serve anyone except the entity that holds the note- because they certainly don't always benefit the borrower and in fact, can really be a detriment to the borrower. All of it is both baffling and maddening to me.
Case in point: I have a home under contract that will be purchased by my clients, buyers, with an FHA Renovation (203K Streamline) loan. The home was built in the 70's and while it's in OK shape, there are many conditions that exist that I know would not fall under FHA guidelines, which pretty much stipulates that the home have basic minimal requirements (like a working stove and a water tight roof) and not have any health & safety hazards. Fortunately, my clients are using their renovation loan to make the majority of repairs, which will ultimately yield them about $20K in equity in the home when the work is complete.
However, as we are wrapping up the underwriting process, the underwriter is scrutinizing a costly repair to the rear patio/pool deck. For some reason, this repair was presented to the underwriter as a remedy to fix "cracks in the pool deck", which the underwriting team decided was frivolous and a "luxury item". What the underwriting team missed is the fact that aside from the cracks which, over time may become a hazard if the cracks become uneven, the real issue is the fact that the poor drainage on the pool deck is causing water to pond up against the side of the house- right at the only door to the rear yard. This is the real hazard. Imagine after a rain storm the homeowner walks outside with a handful of things and slips on the water on the deck or worse yet, they are holding something that has an electrical current- ZAAAAP!!!! (electrocution hazard). Besides that, it's never a good idea for water to stand up against the home because it could negatively impact the structure over time.
Despite pictures of the water ponding on the deck in the appraisal report, the Appraiser failed to call out this condition that does not meet FHA guidelines, even though it was documented independently in the inspection report and in photos the concerned homeowner took of the rear patio to document the situation. Here are a few of the home buyer's photos that went to the underwriting team for review:
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After preparing a report and including the pictures from the general inspection, the appraisal report and my client's photos to plead the case for the money to be granted to the borrowers to complete the repair, the underwriting team decided that 1) the property quality may not meet FHA guidelines, 2) there must be a plumbing problem and 3) Perhaps the inspector isn't properly educated on how to inspect homes.
I won't comment any further about this situation, but it may be clear that perhaps the powers that be who will make the decision aren't fully aware of how to assess a property's ability to meet guidelines and those who they rely upon also aren't fully versed on what guidelines are that they are supposed to follow...
At the end of the day, my goal isn't to demonize every underwriter and appraiser out there- there are definitely those in both groups who are so attuned to what's happening in the marketplace and very geared to do the right thing. Sadly, due to undue influence or force by higher powers, some of the "good guys" have to deviate from their standards. I've seen the process go flawlessly too, though I feel as though many times I wish it I saw those instances more commonly than I do now. Maybe the system isn't broken, but it's suffering from a bad cold or hangover that will resolve itself someday. We can only hope that as the recovery continues and the process is refined further, that the corrections will force the pendulum to have much less of a swing in either direction and a focus on some sort of standard, with a process to address deviations- because they always occur.
In the meantime, may common sense prevail, may "good borrowers" continue to have a shot at home ownership and those who just aren't "good borrowers" yet, someday figure out what they will need to do to become just that if they so choose.