Credit fears may curb home sales
The earthquake that jolted world credit markets last week is roiling Southern California’s real estate market.
August could wind up as one of the worst months on record for the region’s home sales as the market faces a double whammy. Not only is the pool of available mortgage money and other loans shrinking, but consumer anxiety about the real estate market in general is mounting.
Home sales are expected to drop, and experts fear more pending home purchases may fall out of escrow and be canceled.
“The market is very perplexing right now, and people don’t know what to do,” real estate agent Dan Arguelles said Sunday as he was waiting for potential buyers at an open house of a six-bedroom home in Manhattan Beach. Instead, he greeted mostly neighbors and looky-loos who were browsing.
Although it’s hard to track how many pending sales fall out of escrow, real estate and mortgage experts say anecdotal evidence suggests that the current turmoil in the mortgage markets is causing a number of prospective deals to be abandoned.
Gretchen Rolfe of Mission Viejo knows this story all too well. Her home has been on the market since April, and just this month she had three would-be buyers show interest.
“Now their interest is limited,” Rolfe said. “They’re waiting to see what happens to interest rates.”
For the last few weeks, as news about a looming credit crunch shook up the stock market, lenders discovered mortgage money was increasingly scarce, more expensive and harder to package for resale.
Home buyers and sellers are caught in the vise. Eager buyers who thought they had secured a mortgage are hearing “sorry Charlie” more and more. In many cases, lenders have tightened the rules for qualifying borrowers or raised the interest rate in the middle of the escrow process, effectively pricing them out of the deal.
“It’s hard for a borrower to have any comfort level going into a transaction right now,” said Los Angeles mortgage broker Mitchell Ohlbaum, who said he saw a handful of pending deals fall out of escrow last week.
This is just as bad for home sellers who only a year ago -- and occasionally now -- had a better chance at full-price sales and quick turnovers. Now, many willing buyers can’t qualify for a mortgage, and many able buyers are getting cold feet and backing out of the market.
That’s because what began last spring as a credit crunch for borrowers with shaky credit and little or no money for a down payment has evolved into a broader mortgage crisis that is affecting more creditworthy consumers. Lenders are finding that there are fewer investors in the global market willing to buy their mortgages on the secondary market.
“None of us anticipated that credit would become so tight so quickly that it would put further brakes on a [housing] market that had already begun to slow substantially,” said Patrick Veling, president of real estate research firm Real Data Strategies in Brea.
In just a matter of days this month, a majority of lenders eliminated 100% financing and other programs that require no verification of income or assets, and have raised credit scoring criteria and hiked interest rates on so-called jumbo loans of $417,000 or more.
In Southern California, nearly half of all home purchases in the second quarter involved jumbo mortgages, according to DataQuick Information Systems.
The intensifying clampdown is expected to further depress the already anemic pace of Southern California home sales, which are treading at 12-year lows. Even before the recent mortgage commotion, only about 10% of homes were entering escrow within 30 days of coming on the market.
“What’s unprecedented is the speed of the change of the available mortgage terms,” Veling said.
Mortgage broker Ruben Perez started seeing lenders change or eliminate their mortgage programs for riskier sub-prime loans about six months ago, and they seemed to do so every quarter. Then lenders started sending brokers notification of changes every month. Within the last week or so, their notices started coming every day and included changes in loan programs affecting even the best borrowers.
“By the end of the day, I have to call people back and say the program isn’t available anymore,” said Perez, who runs Diamond Point Lending in Pasadena. “It’s very sad for buyers.” As a result, his company is closing about half of the mortgage applications that come in. A month ago, it closed 90%, he said.
Escrow is a key element of the home-buying process.
When a seller accepts a buyer’s offer and gets a commitment for financing, the escrow process begins. An escrow agent is designated to hold on to and transfer money, process the sales documents and oversee the transfer of title.
Typically, the buyer’s offer comes with a written statement from a lender promising to lend a certain amount of money on certain terms. What’s happening lately is that the terms are changing during the escrow period, forcing some buyers to resubmit mortgage applications or making the terms too expensive to go forward.
“In some scenarios a rate change of 1% means that the borrower simply cannot pay,” said broker Ohlbaum, who is president of Legend Mortgage Corp. in West Los Angeles.
Ohlbaum said he was seeing real estate deals die for other reasons too. One client who had been approved for a mortgage that covered 90% of the value of the home she wanted to buy withdrew her offer Friday because “she is scared to death to buy right now.” It didn’t matter to her that since getting loan approval this month, the lender stopped funding such high loan-to-value mortgages.
“She blew the opportunity,” Ohlbaum said, “because she is worried about the market and making a bad decision.”
Times staff writer Alana Semuels contributed to this report.
