Stick a Fork in it!

Once again, we can close the book on another year, and 2011 was nothing if not interesting. Speaking for myself and my team, the year was fantastic, although a mixed bag of the great and not so great. Although the year was without doubt, fabulous, imagine how much better it would have been if we had not had to fight an uphill battle against the media.

Everywhere you turned you heard about the down market: foreclosures UP, sales DOWN. Fannie Mae and Freddie Mac were looking for a hand-out; there were record numbers of delinquent mortgages; more banking regulations were making mortgage lending more restrictive. Through it all, real estate transactions in western Pennsylvania just kept sailing along.

There isn’t any question that life in the real estate biz is different than it was, but in point of fact, the only thing you can depend on is that things are going to change. I go back to the days when you went to your local lender (usually the Savings & Loan that your family had done business with for years), made a mortgage application with the bank manager (whom you knew) and waited for their board of directors to vote on your loan. In the meantime, the board may have visited the property to determine whether they agreed with the price you had offered; there was no need for an appraisal—that was it!

Once your loan was approved, you closed with the bank solicitor at his office. Often your loan was approved just because the directors knew your dad was a good guy. Imagine the process going that way today; everybody would be in jail. The important distinction is that there was less foreclosure then, which was due to two important factors. First, the lenders treated the funds as though it was their money, so they were very careful about how they lent it. These mortgages were investments for the S&L and as such provided earnings for their depositors’ savings. Second, when borrowers found themselves in trouble, they could go to the S&L board and work something out.

Fast forward to today. The lending process is so impersonal, it is a negative image of what it was 40 years ago. Borrowers are just numbers, with their loans being immediately sold on the secondary market. The company who holds your loan today has no idea who you are or what you’re about, and worse yet, they don’t care. It is all simply a transaction on paper.

Perhaps the issue that has seen the most scrutiny this year is the appraisal process. Interestingly, it was determined by the regulators that in many cases, when fraud was found in the mortgage transaction, the appraisal was involved. Therefore, a series of new regulations and reviews have been initiated to keep an eye on this segment of the loan. The problem with this is the broad brush nature of the approach. As with all things governmental, infractions committed by a few impact all. The effect is a slow-down while appraisers second guess themselves and cross T’s and dot I’s. As many of these regulations have just recently been put into place, we will have to wait a few months to determine the final impact, but projections don’t look good.

What has been good has been the interest rate climate, with rates falling all year and standing right now at about 3.75 percent for a 30-year fixed rate. Just a few years ago the prevailing rate was 6 percent (which we thought was a great blessing); at that rate, the payment on a 30-year fixed rate mortgage of $150,000 would have been about $900. At today’s current rate, the payment on that same loan would be $695—that’s about $74,000 saved over the life of the loan.

Another interesting development during 2011 was the relative dominance of the mortgage market by the Federal Housing Administration (FHA). Although the FHA has always been a very strong player, this year they have had to fill the void left when conventional lenders discontinued marginal lending practices. People with relatively low credit scores and small down payments lost their mortgage source if they were not looking to the FHA for financing. It is still possible for someone with a credit score in the low 600s to obtain financing with as little as 3.5 percent down and still have the seller contribute 6 percent of the purchase toward settlement costs.

One of the concerns we had this year dealt with the possibility of losing the 6 percent seller assistance on FHA transactions. There has been serious consideration to reduce the assist to 3 percent; however, although there has been a great deal of discussion on the matter, it still stands at 6 percent.

So overall, 2011 gets a thumb's up. And my crystal ball says 2012 looks to be very much the same.

Gary Straub, real estate professional for over 40 years and member of the Northwood Realty management team.