WASHINGTON – July 13, 2009 – People trying to buy or sell a home may be seeing the process drag out longer than expected and wondering why.
Until recently, a real estate deal could close, on average, in 30 days, real estate agents said. But, bankers and real estate agents said increased scrutiny and tighter restrictions following the subprime mortgage meltdown, and an increased demand for government insured FHA loans has pushed closing times to 45-60 days.
Or longer.
Ask Morgantown, W. Va., resident Denny Vac, who tried to sell his house to a friend. It took 85 days for the loan to close.
That “is a long time,” Vac said. “It seems to me if they’re trying to get an economic recovery going, they’d be trying to make this a little easier to get through.”
Jerry Hall, a broker at Morgantown’s RE/MAX office, said he’s experienced the delays.
“Underwriters have been looking at properties with a microscope,” he said. They’re scrutinizing the loans, too. Properties may drop out the day before closing.
He had one sale hit a snag the day before closing because of the underwriter, he said. It was a bungalow with minor foundation problems. Two inspectors said it needed monitoring but not immediate repair. However, the underwriters wanted it fixed before the money was released. The sale took an extra month. Asked if he also considered the problem counterproductive to economic stimulus, Hall said “very much so.”
There are two distinct issues affecting the home loan process, bankers told The Dominion Post, depending on whether buyers are working with a conventional loan or an FHA loan.
FHA loans
Vac’s friend is pursuing a Federal Housing Administration (FHA) loan through BB&T, Vac said.
FHA says its loans can be good for several types of homebuyers: first-timers, those with little money for a down payment, and those with less-than-perfect credit, among others.
Jane Haines, vice president for mortgage sales at Clear Mountain Bank, said homebuyers putting less than 20 percent down on their homes are required to obtain mortgage insurance to protect against default in the event of foreclosure. Private mortgage insurance firms provide the insurance for homebuyers using conventional loans.
For FHA loans, the FHA doesn’t lend the money, but it insures the loans against defaults, said U.S. Department of Housing and Urban Development spokesman Lemar Wooley. This can make lenders more willing to part with their money.
And, while underwriters for conventional home loans are requiring at least 5 percent down, bankers said, the FHA requires only 3.5 percent and the rules are less strict about where that money can come from.
Vac put his house on the market with a realty firm for $180,000, he said, but listed it with the exception his friend could buy it for $150,000 without involving a real estate commission. His friend was pre-approved by BB&T and they signed a contract between April 16-20, expecting the deal to close not later than June 20.
Vac encountered various frustrations and problems during his long wait. The bank sent the wrong appraiser, and there have been communication problems.
When the deal started dragging out, he said, he considered renegotiating the contract at a higher price, but because of the way the appraisal system works, the house was appraised at $155,000, so he and his friend would have to start the whole process over again.
So he waited. His accountant told him the delay was costing him about $120 a day to hold onto the unoccupied, unrented house – more than $3,000 all told. Meanwhile, the buyer had to rent an apartment for an extra month, costing him more money, too.
BB&T media relations manager A.C. McGraw couldn’t address Vac’s specific situation, but said BB&T has a “longer processing time [on FHA loans] because of increasing volume. ... We’re literally pushing more loans through the pipeline.”
There are also more documentation requirements, she said.
McGraw said BB&T doesn’t keep separate statistics for closing times on conventional and FHA loans, but overall they’re averaging 45-60 days.
In cases like Vac’s, she said, “I’m sure other factors are involved.”
McGraw said BB&T is trying to prioritize home loan processing “to meet sales contract deadlines.”
Wooley said the FHA has noted “no appreciable increase in time for closures,” but the weak economy, the subprime mortgage market meltdown and tightened lending practices produced an “absolute increase in demand” for FHA-insured loans. The market share ballooned from less than 4 percent of all home loans in 2004, to 18 percent now.
“More and more people are turning to FHA as a safe product,” he said.
But Haines is among the local bankers who has seen “a lot longer turnaround” time for FHA loans – because of their growing popularity.
“It may take three weeks to hear back” from the FHA, she said, “and they want more information.”
“It is frustrating for the customer, the Realtor and the banker,” she said.
Another appealing factor for FHA loans, she said, is credit scores. FHA requires only a 620.
Credit scores can range from about 300 to 850, as rated by the credit-scoring system Fair Isaac Co. (FICO), according to various banking sources, and major lenders like to see scores at 700 or above, but typically offer “prime” loans (best interest rates) to folks at 650 or above. A score below 620 is considered bad credit, with a high risk for default.
Despite the increased lag time, Haines said, FHA is still the best route for many people. “Without FHA, more people would be unable to get into homes.”
Conventional loans
Jeff Stewart, associate broker at Pat Stewart Realtors, said, “There are more hoops to jump through. ... It’s just been difficult.” Underwriters will sign off sometimes, he said, and then come back with more requirements.
Another problem he and Hall have observed is appraisals. They’re taking longer, and sometimes homes are getting evaluated by nonlocal appraisers. Hall said that stems from a new regulation designed to prevent conflicts of interest. Banks are no longer permitted to contact the appraiser – the job has to be set up by someone not connected to the loan. For some banks, Hall said, that means bringing in people less qualified who don’t know the area or the market.
Haines and Centra Bank President and CEO Doug Leech said their banks are still using local appraisers. “We know our appraisers,” Leech said, but he’s aware it’s an issue elsewhere.
Centra, he said, has about $1.2 billion in assets, and lent out more than $500 million in 2008. Lending at that rate means Centra would exhaust its assets in about two years. So Centra and other banks sell their mortgages on the “secondary market.” This means Centra approves the mortgage and issues the money to the borrower. But then it packages its mortgages and sells them to megalenders such as Freddie Mac, Fannie Mae, Citibank or GMAC. In this way, Centra gets its money back and puts it back into the lending pot.
Leech said Centra is still closing 99 percent of its loans in 30 days. Haines said Clear Mountain’s in-house loans are going as quickly as ever, while there is a “slightly longer turnaround” for conventional mortgage loans.
But, Leech said, since the economic meltdown, requirements for conventional mortgages are more stringent. He ticked off a number of issues:
“Appraisals are scrutinized like never before.” An appraiser may say a home is worth $200,000, but the underwriter may mark it down.
They focus on the neighborhood and “comparables” – similar homes within the local geographic area.
They want higher downpayments.
“The days of the 100-percent loan are gone,” he said. The secondary lenders want a minimum of 5 percent down, but some don’t like that little.
People with credit scores at 680 or higher could at one time get a loan for 100 percent of the home’s value, he said, but now they want a near-perfect 720 or higher to even consider it.
They want a lower debt-to-income ratio. It used to be 50 percent to 60 percent, he said. That means 60 percent of a borrower’s income could be committed to debt payments. But now they want 36 percent to 40 percent.
They want to make sure the buyer has sufficient assets after closing, he said, to provide padding in case of job loss, income cut or other issues.
“Any one [factor] makes it difficult, but the combination makes it more difficult,” he said.
Customers are also more cautious, he said.
When housing prices rose, some people expected incomes to rise, too, but that didn’t happen.
“People don’t have the confidence to go out on a limb quite as much.”
Copyright © 2009 The Dominion Post
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