The True Case of Mr.and Mrs. X

With all of the bad news coming out of the housing sector last week, including slumping new and existing home sales, word that the Federal Reserve may have to start purchasing Treasury bonds again to keep the economy afloat and fears of a double-dip recession looming over us, I wanted to start this week by giving a good true life example of what I believe is killing the housing market:  unreasonable credit underwriting guidelines that don't make any sense.  The story that I am telling tonight is absolutely true--only the names have been changed to protect everyone involved.  And I think that it really illustrates why the housing sector is having so many problems.

My story begins this past June when I was asked to qualify Mr. and Mrs. X over the telephone because they were looking at purchasing a new home here in El Paso.  After speaking with Mrs. X, I was able to determine that Mr. X's new mid six figure salary in El Paso would be more than sufficient to qualify them for a home here in El Paso without them having to sell their existing home in Far Far Away.  Since their credit scores were sitting right at 800 and they had virtually no debt, I knew that this would be an easy transaction.

Mrs. X wanted to sell her home, but in July with summer coming to a close and school starting, she decided just to go ahead and purchase her home here while leaving the other one on the market.  But since she had not been able to sell the other home yet, she decided that she wanted to put only 10% down on the new home she was buying.  Since her first lien would be over $417,000 which was the conforming loan limit in El Paso, I checked lenders' guidelines carefully for a program which would allow her to borrow up to 90% of the sales price.  And finally, I found a loan program that would allow us to do two liens--a first lien of 80% and a second lien of 10% more.  I reviewed all of the product guidelines to make sure that we had a high enough credit score, low enough debt, etc.  I also talked to the lender's representative to make sure that everything was acceptable.  Then I sent off the second lien for approval with the second lien lender, and I got it approved within 24 hours.

Feeling good about the transaction, I uploaded the entire file to the first lien lender, ordered the appraisal, and waited.  I had been told that underwriting took 3 and a half days, but I sent the file in at the end of the month so I knew we could have some delays.  Three and a half days soon dragged into two weeks as we waited for underwriting and the appraisal.  And since I knew that appraisals on properties over half a million dollars in El Paso can sometimes be a challenge--of course the lender required us to use their appraisal management company--and I also knew that we could not get final underwriting approval without the appraisal, I waited.

Finally, two weeks after the file was submitted, I got the underwriting determination back.  But instead of an approval asking for little more than the appraisal,  I received a "suspense."  The investor to whom my lender was selling this loan had placed El Paso on a "declining markets" list for areas where the home values are dropping and for this reason they would not allow the second lien even though the second lien was already approved.

By now, Mr. X had flown back home and was preparing to drive a moving truck down to El Pas filled with all of the family's furniture and belongings.  I called Mrs. X to tell her what had happened and she immediately went to work selling stocks and liquidating her accounts to get the 20% down payment which the lender now required.  By the following afternoon, she had wired the down payment to the title company and sent me proof of the assets.  I sent everything back to the underwriter, and since we now had an appraisal which was actually significantly higher than the sales price of the house, I hoped that the lender would now sign off on our conditions.

I was about to be disappointed yet again.  This file had to have a supervisory underwriter's signature.  That meant another week before our file and our appraisal could be reviewed.  By now, Mr. and Mrs. X and their furniture and children were in El Paso with no place to stay.  And when the file came out of underwriting again, it had new conditions on it--conditions added by the supervisory underwriter who, as she expressed in an email to me, would have added even more conditions than these except that the primary underwriter talked her out of doing so.  In addition to wanting additional print outs of paperwork already supplied, the supervisory underwriter wanted to see more money in savings to prove that Mr. and Mrs. X could make the payments on their new home for at least six months.  We had to document every cent that we could find even though the entire down payment had been sourced and verified and was waiting at the title company.  And since we were not allowed to use the cash value of life insurance or retirement accounts as reserves, this proved to be quite a challenge.  Further, the underwriter gave us credit for only 60% of the value of their remaining stock accounts.  Using these restrictions we could barely squeak out proof of the required savings. 

Mr. and Mrs. X closed last Thursday, fifteen days past their closing date.  We had three underwriters involved.  The X family ended up having to rent the house they were purchasing in order to have a place for themselves and their furniture while we worked to meet all of the demands being placed on us.  I had to send them the underwriting worksheets to prove that what I was telling them about their conditions of approval was true.  They simply could not accept that they would be having these kinds of problems qualifying for a loan.  After all, when they purchased their home eight years ago, they did not have any problems at all.  And if they had been purchasing this home three years ago, they would not have had these problems--they would have been qualified, closed and moved in right on time. 

The next time that I hear someone say that the U.S is only in the mess it is in because "a bunch of people got homes who couldn't afford them," I will think of Mr. and Mrs. X.   The mortgage industry has evolved in just a couple of years from looking for ways to put everyone into a home to looking for reasons to deny every file.  Lenders and investors are so afraid of making a loan that goes bad that they do not want to take a risk on anyone--even people like the Xs who are not much of a risk at all.  That is the reason that one major investor in jumbo loans (loans over the conforming loan limit) has publicly stated that they are comfortable denying 70% of the mortgage applications they see. After being pilloried for years for making "bad" loans which destroyed the economy, we as an industry almost feel righteous when we turn a loan down.  We are holding the line against a potential default, but we are also holding up a transaction--a flesh and blood buyer and seller who need to move on with their lives.  And until this new mindset changes, we are not going to see the housing market improve no matter what kind of incentives the government provides.