Matt and Kimberly Brown's contract to buy a new home in Yelm, Wash., will expire at the end of the week. They've lined up a no-money-down loan through the Department of Veterans Affairs, but the Browns haven't been able to sell the town house they live in, so they will have to back out and lose their $1,000 deposit.
"A lot of people looked at (the town house) and love it," says Matt, 26, who works in auto insurance claims. "But they either can't get the interest rate they want for a home loan, they can't get accepted for a home loan, or they can't afford it."
The problems in the mortgage industry, which began late last year and have rapidly deteriorated since June, are having a domino effect in the real estate market.
Increasingly, first-time home buyers are getting shut out of the market, and that hurts move-up buyers like the Browns, who are asking $182,000 for their town house.
Homeowners are also having more trouble refinancing their escalating adjustable-rate loans, and that is increasing the number of foreclosures and the supply of homes on the market. As a result, sellers are having to wait longer and cut their prices more deeply.
"If conditions in the mortgage market don't get much better in the next 30 to 60 days, we could be in for a major national correction, instead of a soft landing," says Hessam Nadji, managing director of research for Marcus & Millichap Real Estate Investment Services in Encino, Calif.
The turmoil in the credit market is leading forecasters like Nadji to push back their expectations for the recovery of the real estate market. Home sales have fallen dramatically since their peak two years ago and aren't expected to bottom out until the end of the year at the earliest.
"The credit crunch is exacerbating the drop in buyer demand and potentially compressing the natural downturn we expected to be spread over six months into a few weeks," he said.
Just two months ago, Barbara and Jeff Barker were happy they had finally rented Barbara's former home in Sparks, Nev., which they had been trying to sell since November 2005. The new tenant has an option to buy the home in June for $375,000. That's $100,000 less than the Barkers' original asking price, but they agreed to take it.
Now, the tenant, a single parent, is "telling us she is not sure she can qualify for financing and wants to extend the lease another year," says Barbara, 44, a middle-school teacher.
"We might be in the predicament again" of trying to sell their house, she says.
Nationwide, more sellers and agents are complaining that homes will take even longer to sell now than last year because more contracts are falling apart over the financing.
Larry Underhill, an agent in Stockton, Calif., says he's seeing homes go under contract two or three times. Each time, he says, the deal craters, because "Buyers can't qualify, or buyers are understandably cautious. They see property values sliding and are saying, 'Why am I doing this?'"
Lenders are now demanding that customers have larger down payments, more cash reserves in the bank, more proof of income, higher credit scores and less debt. They are cutting out 100% financing loans and eliminating short-term, adjustable-rate loans.
Jumbo-loan rates jump
It's not just cash-strapped and newbie buyers who are getting rejected. The credit-tightening is also cutting off prime buyers in high-cost cities who often need to borrow more than $417,000. Interest rates for these so-called jumbo loans have risen dramatically in recent weeks to entice skittish investors to buy them. The mortgage industry depends on Wall Street to raise money for mortgages and also to buy pools of mortgages as investments.
"We had a buyer, a doctor with an 800 (point) credit score, a down payment of more than 20%, and the (lender) backed out at the last minute," says Lisa Gregory, an agent at Prudential California Realty in San Diego, who represents the seller. "We were stunned."
Since the end of June, the average interest rate for these jumbo loans has jumped to 7.43% from 6.96%, while the interest rate for conventional loans has declined slightly to 6.68%.
That gap in interest rates means a borrower with a $417,000 loan will have a payment that is $217 a month more than a borrower with a $416,000 loan. In areas where homes are already unaffordable for many working families, that can be a budget breaker.
Greg McBride, a senior financial analyst at Bankrate.com, thinks what's happening in the mortgage market is a sign of over-reacting investors. Still, he says, "If this situation persists for months on end, it will have an effect on higher-end home prices. Many buyers will effectively go on strike, and those that remain won't have the same buying power."
The qualification hurdles are so bad in California, where the median single-family home costs about $595,000, that a record number of sellers are offering to lend money to their buyers in the form of second mortgages. From April to June, almost 5% of home sales in the state had seller mortgages on them. Three years ago, less than 1% of sales had seller "carry back" financing, according to DataQuick Information Systems.
While the easy-money bank loans have dried up, there are a couple of programs backed by Fannie Mae and Freddie Mac that let lenders make mortgages for 100% of the home's value. Both programs, however, have income limits for borrowers and a maximum loan ceiling of $417,000.
More home sellers and buyers are also turning to the Federal Housing Administration, which caters to low-income and first-time buyers and offers a 3% down-payment loan.
Rebecca King, a 15-year renter, got an FHA loan last month. As a single parent, she couldn't afford to buy a home in Seattle but found a home 25 miles north in Everett for $275,000.
"I didn't ever think I'd be able to do that in the Seattle area, especially after everything I had read about foreclosure and interest rates," said King, 47, a nurse. "But I didn't want to be on the rental treadmill, and so in June I went ahead."
But while FHA applications are up more than 75% since December, the portion of loans approved was up only about 20% in the second quarter, the agency said, largely because many borrowers still can't qualify.
Both the House and Senate have passed bills to modernize the FHA program, which has changed little since it was created in 1934. But these measures still face opposition in Congress, as do any plans to involve the FHA in a bailout of homeowners who are facing foreclosure. The Bush administration last week rejected calls to raise the maximum loan limit for FHA, Fannie and Freddie above $417,000.
And it's doubtful that any proposed changes could come fast enough to help the roughly 2 million American homeowners who were behind on their mortgages at the beginning of the year, according to the Mortgage Bankers Association, or the 560,000 of those who were already in foreclosure proceedings.
But this problem isn't going away. Loan delinquencies and foreclosures are expected to rise steadily for at least the next six months as people with adjustable-rate mortgages (ARMs), which were fixed for the first two or three years, continue to reset to higher rates.
The foreclosures have been concentrated in areas that have suffered extreme job losses, such as Michigan, Ohio and Indiana. In the past year, they have also increased sharply in California, Arizona, Nevada and Florida, where prices and sales are falling, making it harder for homeowners to refinance.
When Christine and Michael Canavan moved from Fort Lauderdale to Melbourne, Fla., two years ago, they bought a $250,000 home with a subprime-borrowers ARM that allowed them to pay only the interest on the loan each month, which meant they wouldn't build up any equity unless their home appreciated in value.
After two years of making their payments on time, their credit score had improved to prime level, but the value of their home sank suddenly this summer.
"I had to go to (the mortgage broker) three times because our appraisal kept depreciating," said Christine, 38, an elder-placement counselor.
"At first he said, 'Great news, your home appraisal would be $275,000.' Within a week, the home had gone down to $240,000. When I went in to do the paperwork, I was in tears. It had dropped to $230,000 in two weeks."
Unsure of the future
To refinance with a 30-year, fixed-rate mortgage, the Canavans had to scrape together $19,000 to pay off their old loan.
"I feel so sad for families that don't have money to bring to the table to refinance these loans," she said.
Those families include Loretta and Jimmy Mendez. They bought a $219,000 home in nearby Palm Bay with an interest-only three-year ARM that resets next year.
"We invested $20,000 in this home," says Loretta, 31, a dance teacher. "Not only did we lose that money, we owe more than what the house is worth. We're supposed to refinance soon, and I don't know what we're going to do."
There are a lot of homeowners and home buyers who, like the Mendezes and the Browns in Yelm, Wash., are unsure of the future, hoping the mortgage market calms down soon.
For now, Matt Brown says, he and his family will start over, looking for another new house and hoping someone will qualify for a loan and buy their town house.
(c) USA TODAY, 2007