Is Forward Looking Indicator At The Heart Of Market’s Deferred Dreams? Or Does The Public Need To Be More Informed?

By Orlando Rodriguez

You always remember the one who broke your heart. All these years later, you can still feel the pain, taste the tears and still remember how foolish you felt, having been strung along by lies, lies, lies.

These sad love stories live also in the world of real estate. When potential buyers and sellers get engaged only to have one party stand them up at the altar.

In real estate these future wedding day abandonment’s live as engagements called pending home sales, a monthly indicator released by the National Association of Realtors, usually relied upon to show growth potential in the market.

However, grooms and brides with cold feet have been common as of late. Double-digit pending sales have not translated into double-digit growth in actual completed transactions. In March, existing home sales declined by 2.6 percent and fell in February by 0.9 percent.  Yet pending sales are at a five-year high.

How is this possible?

Parties make it to contract, but do not close.

“I close deals, but the deals I’m supposed to be closing, are not” said Jamie Cornwall a mortgage agent with Miralex Mortgage in Rosedale, New York.  “People get frustrated with me, thinking I’m doing something wrong and it’s not really me. The banks don’t want to trust anybody basically.”

Sales and mortgage agents said that even clients with high FICO scores and two incomes still cannot seem to tie the knot at the end.

“We have many clients with over 700 credit scores that could not actually do a loan modification because their debt to income ratios were higher than 45 percent,” said Richard Conde, a loan officer and mortgage consultant in Queens. “No programs out there will actually close them.”

Mr. Conde said that once upon a time, the credit score was a leading indicator to forecast whether a client would be ultimately approved. But it has now taken a back seat to overall debt.

“Good credit scores no longer call the shots” he said. “Your debt ratio can still not go over a 7 threshold. I believe it’s a lack of knowledge on the realtors end.”

[audio:|titles=Mortgage broker Richard Conde speaks on why the residential market is not seeing sustained sales growth.]

Mortgage officers like Mr. Conde feel that not enough attention is being paid to the debt to income ratio early enough in the mortgage application process. Many mortgage agents in a rush to pre-approve a client, bypass this step. Inadvertently selling their clients an unreachable dream and contributing to a rise in pending sales that will more than likely not close.

The scenario goes something like this: a potential buyer goes to a real estate broker, pre-approved mortgage in hand. The broker in turn finds a property the client likes, getting it to the contract stage. However, in the end the lending bank does not approve the mortgage once a bank officer goes over the application more thoroughly.

Anthony Lopez an agent with 212 Realty is not surprised.

“This is what happens when you scrutinize the mortgages,” he says. “Now you better come correct. They are going to be more selective.”

Sales agents like Mr. Lopez say that it’s possible that word of record low interest rates and low housing prices are being equated to somehow mean lower qualifications in the minds of misinformed consumers.

This, Brooklyn based property salesman Sean Muniz says should be combated by a dose of reality and accuracy.

“A lot of mortgage officers are misinterpreting the law,” he said. “But sales brokers should then be realistic and honest by informing their clients of the realities and possible obstacles that they may encounter. They need to be more responsible.”

This however, may be nearly impossible to implement on a mass scale. Sales agents are severely limited as to what they can advise a client to do since they are not attorneys. Therefore all obstacles in the paths of buyers may not get fully mine swept.

One of these potential explosive devices lies in the financing bank’s property appraisal process, particularly when it comes to the purchase of discounted homes.

Many buyers have attempted to purchase foreclosures via conventional financing, but to no avail. These deals commonly run into approval problems, but yet again are reported each month by real estate brokers as a pending sale, as long as they go to contract.

“Remember, the selling bank is not the same as the financing bank,” said Mr. Conde. “So when the investor financing those loans sees the appraisal showing that the homes need too much repair and cannot pass FHA, they don’t meet the financing investors portfolio qualifications.”

Housing advocates however feel that it is not qualifications but greed that is motivating banks to disapprove loans for the very same properties that they have on their books as foreclosures.  Pilot programs like Bank of America’s “Mortgage to Lease” they say are just an attempt to maximize profits.

“Investors would rather wait for the re-emergence of the housing market that they believe is coming rather than sell off the properties to non-profit groups,” says Rachel Laforest, Executive Director of The Right To The City Alliance, an advocacy group that helped to organize protests at Bank of America’s shareholder meetings in Charlotte. “The banks are trying to hold on to the foreclosed properties without doing principal reduction for as long as possible.”

[audio:|titles=Rachel Laforest On Capitalist Views Of The Foreclosure Crisis]

Regardless of institutional motivation, large levels of distressed inventory can only move but so much without conventional financing available to regular home buyers by banks.

“Tight mortgage credit is holding back a stronger recovery,” said Lawerence Yun, chief economist of the National Association of Realtors. “Banks are hoarding cash, possibly from regulatory uncertainties and lawsuits. A high proportion of all-cash deals are hiding the current dysfunctional mortgage market.”

This dysfunction is what may also be hurting the jobs market. May economists feel that a full recovery will not be possible without a rebound in the housing sector.

“The employment market will come back when the housing market ceases to be as big of a clog as it is to the recovery,” said Beata Caranci, Deputy Chief Economist at TD Bank. “By taking a lot of foreclosures and allowing them to go into Real Estate Owned at a faster rate and allowing investors to come in and develop them from a renters perspective, that allows home prices to recover. That gets people spending, that gets confidence back up and gets job creation started again.”

Washington Heights restaurant manager Tony Mullen is one of these potential job creators who has run into problems caused by tight credit each of the past five years. In 2007, the 67 year old purchased a commercial property in the Poconos with two co-workers hoping to convert it into a restaurant.

After they failed to obtain construction financing they attempted to get a re-modification of their loan each year. Every time it was rejected in the final stage.

“It is very disappointing,” said Mr. Mullen. “This was my lifelong dream. I had hoped we’d be up and running by now, but all we can do is rent out the apartment upstairs while the restaurant stays empty. It’s a real waste.”