This article appeared on page A – 1 of the San Francisco Chronicle
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Mortgage woes have moved upstream, landing even in tony neighborhoods.
The credit crunch now is hitting home buyers from all walks of life, not just subprime borrowers with poor credit. That in turn could mean fewer buyers – and lower prices.
For instance, a multimillion-dollar deal in Larkspur went belly-up last week when the lender yanked the financing at the last minute.
“Everything was perking along smoothly. All contingencies were removed,” said Bill Hogan, a Realtor with Coldwell Banker in Greenbrae, who sold the four-bedroom home for $2.45 million and expected to close the deal later this month. “The loan was approved and locked in. People were ordering moving trucks, everyone was feeling euphoric.”
On Thursday, the couple buying the house learned that their lender was rescinding their loan because they were making only a 10 percent down payment.
“All of a sudden the lender, because it is backed by a series of investors that are feeling very shaky and panicky, decided it could no longer honor the loan commitment,” Hogan said. “This was not a subprime loan; this was fully documented, people with outstanding credit who own a $5 million home now and didn’t need to sell it to buy this one.”
The buyers could have gotten a mortgage at a substantially higher rate – just under 8 percent – Hogan said, but “they crunched the numbers and said, ‘Hell, no, maybe this is a sign for us to get out.’ ”
The buyers walked away from the deal, forfeiting their $73,000 deposit. The home is back on the market for $2.2 million, its original asking price.
The incident underscores how the mortgage crisis could undermine real estate prices.
Lenders nationwide have drastically tightened their purse strings because Wall Street investors, spooked by rising foreclosures and defaults, no longer want to buy mortgages. Earlier this year, both lenders and investors soured on subprime loans to people with poor credit.
But starting last week, Wall Street started to spurn jumbo mortgages – those above $417,000 – even for borrowers with sterling financial profiles. Those loans have become scarcer, harder to qualify for and more expensive.
In the Bay Area, high home prices dictate that most mortgages are jumbos.
“A month from now, when we’re reporting closings for the month of August, we think that will be a pretty lousy number because of the mortgage market crunch,” said Andrew LePage, an analyst with research firm DataQuick Information Systems of La Jolla (San Diego County).
The one bright spot for Bay Area real estate in the past year has been upper-end sales. The median price of homes has risen in many counties. That’s not because prices rose but because a larger percentage of sales was for more expensive homes. At the same time, sales of homes in what passes for inexpensive here – less than $600,000 – eroded significantly because many entry-level home buyers were knocked out of the market by tighter lending standards several months ago.
“If people are having trouble getting jumbo loans, it will put downward pressure on the high end of the market,” said Michael Carney, a finance and real estate professor at California Polytechnic State University Pomona. “People know it will be tougher to get loans. A lot of potential buyers will wait.”
The big unknown is how long the credit crunch will last. Many experts said they think the tight market for jumbo loans to people with good credit is likely to last only a few weeks.
“The situation at the moment is pretty dire by many accounts, but history suggests this could easily be a short-term overreaction in the credit markets,” LePage said. “A three-week phenomenon isn’t going to sink the market, however bad it is at the moment.”
LePage and others pointed out that sellers are generally slow to reduce their prices, which also would lessen the fallout from a short-lived credit crunch.
“Sellers always lag behind the reality,” said Mary Dresser, a Realtor with Prudential California Realty in Montclair. “They’re never willing to respond to the current market conditions in a short-term fashion. They need to see something go on for months before they finally get it.”
While jumbo loans should become more affordable eventually, that doesn’t mean the days of easy lending will return. Lenders now are adamant that borrowers meet increasingly stringent guidelines for their credit history, earnings and assets.
“Credit (scores) have never been more important,” said Richard Redmond, a broker associate with All California Mortgage in Larkspur. “The market is unforgiving, and it’s all about the score. You have to have the minimum the lender requires, or you don’t get your home.”
Redmond said he had one client who didn’t pay a $15 credit-card charge for a product he hadn’t ordered. That temporarily lowered his credit score to 697.
“In this market, I cannot do a stated-income, cash-out refi with his credit score below 700,” Redmond said. “There are no doors open for him, until we get that credit score changed, which we hope to do within a week or 10 days.”
Still, he and others said that well-heeled borrowers with 20 percent down payments can still find mortgages – it’s just that they’ll pay higher rates, 7.5 percent or more, for jumbo loans.
Even in the tighter market, buyers often can recuperate when they lose their financing.
Owen Rosenberg, an agent with Zip Realty in Oakland, represented a woman buying a Berkeley condominium who had arranged a mortgage with American Home Mortgage, which filed for bankruptcy last week.
Rosenberg said his client found out her loan was scrubbed just one business day before she was slated to remove her loan contingency.
“Luckily, my client was proactive,” he said. “She had talked to two other lenders besides this one, so at the 11th hour, when we found out the loan wasn’t going to fund, she was able to go to one of the other lenders.”
Hogan, the Marin County Realtor whose Larkspur deal fell through, said he has two other pending deals in the multimillion-dollar price range.
“I called the lenders on those properties to make sure we still had (loan) commitments,” he said. “The guy at (one) said, ‘Yeah, you’ve got my commitment, but we still have to get the imprimatur from the investors.’ We’re sitting on the edge of our seats now to see if these escrows will close.”
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