Back about five or six years ago, when the housing bubble was still rising, just about anyone could get a mortgage. Lending institutions were handing out ridiculously bloated home loans to almost anyone who breathed. It didn't matter if you had a rotten credit history, it didn't matter if you didn't have a job and in some cases it didn't even matter if you had any income at all. It was basically an orgy of mortgage lending. But now the pendulum has swung 180 degrees in the other direction. Severely burned by the subprime mortgage crash, mortgage lending institutions have been seriously tightening their lending standards. As a result, in 2010 it is extremely difficult to get a home loan or a mortgage modification. In their determination not to get burned again, mortgage lenders have completely overreacted and now a lot of highly qualified people can't get a home loan.
This point was beautifully illustrated recently by one of our readers named John....
I was just turned down for a home loan. My credit score is 799, my wife’s 804. We had $40,000.00 to put down, which was almost 30%. BUT! Our bank turned down our application! Why? They required us to have 6 months “operating expenses” in the bank after all closing costs were covered. They came up with an arbitrary number on their own, based on our bills and such. We had that amount and more on top of our closing monies. Then why were we denied the loan? Several thousand dollars were from “cash” and the bank required that “cash” be in the bank for at least 60 days or they wouldn’t consider it fluid funding. Needless to say we didn’t make the closing date and are hiring an attorney to avoid being sued (by the seller).
A reader named distressedinbham on another website had an even more frustrating experience trying to get a home loan modification....
I am self-employed, have been all my life and have owned a home for 30 years. When I started my Loan Modification process in August of 09 I WAS NOT behind on any payments. I sent full documentation, over 150 pages, with the things they needed to verify my income. I am now 2 payments behind and I am getting nowhere. They keep flipping me between Loss Mitigation and Imminent Default, back and fourth month end month out. I made a habit of calling every week, then every two weeks just to be sure all was moving forward. From the middle of November I was told my file was with the underwriter and it would only be 30-60 days. I began automatically updating my income verification, verification that I still resided at the property and an updated 4506-T every month. In the middle of April a rep finally told me I was not in the loan modification process. In fact, that I had been denied on March 2. Keep in mind, I'm talking to these people every 2 weeks. She did a financial interview and sent me a new packet so that I could start all over, resubmitting all the documentation yet again. She told me she was my Account Manager. I completed the packet, called with a question (2 weeks later - over a week to receive the packet and another few days to complete it and gather all my documents again) and learned that my "Account Manager" was on maternity leave and I now didn't have an account manager. Also, I was told that I had received the incorrect packet...it was the old version rather than the updated version. She asked me to fax four or five pieces of information in the hopes it would, quote, "jump start my file back into the process" and said she we send me another packet. That was mid April. Here we sit, 2-1/2 months later, I have still not received anything in writing about my rejection. And, though I've now had people tell me on three separate occasions that I would receive a new packet, it has yet to show up on my door step. I asked several times why my application was denied and the answer I finally got last week was that it was because I was DELIQUENT in my payments. Call me crazy but I thought that was the whole point??!! I almost hired a third party but am so hesitant to take that step. Every time I get on the phone with them it takes an hour out of my day and I am usually so upset I find it difficult to work, so I just don't call. I'm going to sit back and regroup and decide what I need to do next.
The truth is that scenes such as these are being repeated over and over again across the United States right now.
Scott Stern, the CEO of Lenders One, says that a lot has changed since 2007....
"Lending standards have tightened dramatically between 2007 and 2009."
In an attempt to avoid the mistakes of the housing bubble, the mortgage industry has now created a situation where standards are so tight that the entire industry is freezing up.
In May, sales of new homes in the United States dropped to the lowest level ever recorded. To be more exact, new home sales dropped 32.7 percent to a seasonally adjusted annual rate of 300,000.
Keep in mind that a "normal" level for new homes sales is an annual rate of about 800,000.
New homes have never sold this slowly ever since the U.S. Commerce Department began tracking this data back in 1963.
Now, a lot of the drop in new home sales has to do with other factors, but certainly the fact that people are having such a hard time getting approved for loans is playing a role.
If large numbers of qualified people are getting turned down for mortgages that is going to suck a lot of money out of the marketplace.
And without enough qualified buyers, the U.S. housing industry is simply not going to recover.
But it isn't just a lack of qualified buyers that is the problem.
The truth is that the U.S. real estate market is a complete and total disaster right now and there is every indication that things are going to get even worse.
So what does all of this mean?
It means that it is going to remain very difficult to sell homes.
It means that prices are going to continue to come down.
It means that real estate agents will continue to suffer and there will continue to be high unemployment in the construction industry.
In fact, every industry that is highly dependent on the U.S. housing market is likely to continue to feel a lot of pain for a long time to come.
So do you have a mortgage horror story to share? If so, please feel free to leave it in a comment below.....