Desperate Words from Home Building’s Trenches
A home builder who’s fighting for dear life with operations in two regions called in a panic. He’s got new product coming on line, designed and priced to offer buyers a new-home alternative to resale and distressed sales cropping up all over his markets.
But he’s got two problems:
- One is that his new product line is residential over retail and office units, and he can’t get banks to appraise the residential units in a way that reflects any value in the commercial units.
- Two, he’s had not one, but two potential mortgage lenders come back with word that FHA loans now require a minimum 640 credit score for borrowers.
Getting his units valued and getting his customers loans for places where buyers could qualify on the remaining 60 days of the $8,000 first-time buyer tax credit are now big sudden headwinds, after all the investment and construction operational speed and efficiency in getting the product ready to go online before the tax credit expiration.
FHA loans, which dropped to single-digit percentage share of new-home mortgages in the first part of the decade thanks largely to the proliferation of subprime and other exotic mortgage products, now account for six or more out of every 10 new-home loans, and without the FHA to back lenders now, many borrowers would be out of options.
On Sept. 4, The Wall Street Journal reported:
Some economists say the FHA’s lending has been crucial to preventing a deeper bust in property. Thomas Lawler, an independent housing economist, said “the alternative could have been a complete meltdown of housing finance” that would have ultimately led to much larger losses. Critics have said the FHA, which has never had a chief risk officer, isn’t able to manage such a large portfolio in an unstable market.
Policymakers have used the FHA to stabilize the housing market by pushing it to offer credit with far easier terms than that offered by most private lenders. For example, it will back loans with down payments as low as 3.5%.
As default rates in FHA loans notch up–7.8 of FHA loans are late 90-days plus, i.e. in default, per Inside Mortgage Finance – stress gets added to their guidelines to banks. This means more nail-biting for home buyers who may have qualified at a lower credit score even a month ago.
These stories are legion.
In a virtually no-debt available environment, private home builders are pulling out the stops to meet the market at least half way. They’re virtually locked out of lending for cheaper land reloads, and loans to go vertical are almost as scarce.
This latest set of tidings out of the banks make it abundantly clear why more and more privately funded home builders say “bank” like it’s just another four-letter word.
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