Stolen Jewelry and $270 Insurance Refund Needed to Close $1 Million Laguna Beach Home Purchase
Has the Mortgage Pendulum swung too far in the wrong direction?
We have all heard the cautions of tightening lending standards. Most homebuyers in today’s real estate market have braced themselves for the adventure that has become the loan underwriting process. The “old rules” of “easy” lending that have plastered the news, targeted as being the culprit of our current economic situation, have been replaced by “new rules” which the big banks have promised are here to stay in the quest for more favorable lending practices. But how good can the “new rules” be when a buyer needs to scramble for $270 after putting over $200,000 in escrow to purchase their dream home in Laguna Beach? Will the “new rules” squeeze the financial middle class out of the real estate market?
For one recent Laguna Beach Home Buyer, what should have been an easy loan decision ended up resembling something akin to a 3-ring circus. As reams of documentation were sent and re-sent to satisfy a seemingly endless demand for loan conditions, and as promises of full loan approval and loan docs were issued and retracted, the buyers started to wonder why they were messing with a loan at all when they did, in fact, have access to the cash available to close the purchase without the assistance of financing.
The lender’s promise is to “be with you all the way”…it may be wise for a home buyer to find out what type of journey the lender has planned.
Tale of a Laguna Beach Home purchase
The home to be purchased was priced just over $1,000,000 and would be owner occupied. They put a 20% down payment into escrow and sought an 80% LTV loan of just over $800,000. It is important to note that the loan amount they were seeking is above the loan limits for government-incentivized programs. Their down payment funds were the result of $220,000 proceeds from the home that they just sold and closed. There was no question about where the down payment money came from.
The borrowers had good credit scores, well above 700; the primary wage earner has held the same job for over 19 years with a reputable company and it was clear that the amount of money he earned was sufficient to repay the loan. So what was the problem?
The part of the process that became most daunting for the lender, one of the five major banking institutions, was the question of reserves. Lenders want to be assured that borrowers have enough available cash in reserves to repay the loan for a period of time in the event of unforeseen circumstances. The underwriting guidelines for this loan required that the borrowers show an amount equal to 20% of the loan amount, or just over $165,000. This amount covers almost 30 months of mortgage, tax and insurance obligations.
So, to purchase a home valued at just over $1 million, this borrower needed to have close to $400,000 of cash…near 40% of the value of the home.
Some may believe that this is fiscally responsible in light of our current financial situation. However, the scramble for “qualifying” reserve funds bordered on ridiculous.
It’s important to note that these borrowers have over $1 million in a 401K plan; however, required some paperwork and a few weeks to obtain. In this lender’s eyes, the delay in access deemed the funds not liquid and thus could not be used as proof of the required reserves.
So what did the lender decide was acceptable proof of the $165,000 “liquid” safety net?
- A percentage of the $50,000 college fund established for their kids;
- A portion of company stock options (valued at almost $100,000) available to the borrower only during certain times of the year;
- Money from their recent tax returns of almost $15,000 (good thing they purchased during tax season!);
- Money in a liquid savings account of almost $5000;
- Money they could borrower from a Line of Credit from another of the large banks of which they would need to go through a re-approval and funding process;
- A cash advance loan from a Credit Card;
- Cash obtained from their overdraft account;
- Documentation for an insurance claim for jewelry that was stolen of which payout was expected at some point in the future;
- A refund for $270 obtained from overpayment on their auto insurance policy (yes, really – this was needed for approval!).
Mounds of paperwork and proof were collected, sent, and then re-sent to various underwriters and supervisors who reviewed the loan file for approval. Even when one underwriter accepted the documentation, another underwriter was at liberty to un-accept that same documentation and ask for even more in order to satisfy their own additional requirements.
After a while, it was as if nobody wanted the “buck” to stop on their desk. It was a hot potato scenario for a very cool loan.
What will strengthen Real Estate recovery?
As people continue to look for the bottom in housing prices and a recovery in the mortgage industry, it seems logical that we will not see it until the mortgage and lending industry finds a better way to distribute funds. Most of the lending and real estate home sales in the first quarter involved loans at government-supported levels. Government stimulation and support lessened risk and increased rewards for the banks.
Home buyers in Laguna Beach, where sales prices tend to be greater than $750,000, are often choosing non-bank financing to purchase their home. Overall, 41% of Laguna Beach homes sales since January 1, 2010 were accomplished using all-cash, private, or “other” financing. As the price tag of the home increased, so did the use of non-bank financing. When homes sold for $3 million or more, 61% of buyers avoided the banks. For Laguna Beach real estate priced over $5 Million, buyer’s took a 75% vote of no-confidence by avoiding bank financing.
Will a cycle of fear of accountability, paper-intensive qualification, avoidance or delay of lending decisions, and extreme auditing continue to muddle the lending process resulting in extreme delays to our economic recovery? Will these delays keep home prices down or even drive them down further as more buyers refuse to participate in the Loan Paper Decathlon? Will there be a chasm of home ownership where only those that can afford to pay cash, or those that can qualify for loans at government-incentivized dollar amounts, benefit from the American Dream of home ownership?
