Like a grandfather clock ticking away, secondary residential mortgage loans were originated and closed with ease. But with every fraudulent loan closed, the pendulum swung further away from center until it lead our industry and economy into a massive recession primarily linked to real estate related issues. No longer can we assume financing will be available for a property based upon the agreed transaction sale price. The lending market today is not defined by what a buyer is prepared to pay for a given property

As a result of the off-center pendulum and due to the complexity of the real estate market we are experiencing very conservative reviews of property values. This is reinforced by the fact that in most locations property values have declined and this has been coupled with significant and continuous unemployment and job losses. Mortgage loans that require mortgage insurance are heavily scrutinized by MI companies which are losing hundreds of millions of dollars due to claims.

While community banks did not participate in the type of lending that brought us to where we are today, new federal regulations have change the way appraisals are completed all over the country. Many community banks are located in unique rural areas that require an understanding of the local housing market by the appraiser and a common sense approach to comparables.   Unfortunately, due to the new HVCC regulation and the fact that a majority of homes sold today are foreclosed properties or short sales, common sense lending practices seem to have disappeared. The media frequently cites decreases in average property values of up to 20%, despite the fact that if you factor out the foreclosure sales, the bank sales, and the short sales, property values actually increased by 2%. Unfortunately, we cannot value property without including the impact of these distressed sales. Going farther away from the subject property or going back further in time to generate comparables to establish the value of the subject property in today’s market will not be accepted by the secondary market.

The original two questions that were asked many years ago about all loans are now being asked again. 1) Can the borrower make the mortgage payments? 2) If not, can I sell the property and not lose any money?  Even if the answer to the first question is yes, today it is rare to receive a yes to the second question. Borrowers who looked great when the loan closed no longer have jobs and are unable to pay their mortgages. As a result, lower loan to value ratios are required and strong substantiation is needed to make loans when faced with the reality that the underlying property value is not worth as much today as it was two years ago, and may even be worth less if the unemployment issues do not improve in the near term.

The pendulum will swing back to more common sense lending, history has proven that. But until then, as a community bank lending in today’s housing market, the FHA/VA and USDA Rural Housing programs can help get your borrowers to closing when the GSE secondary market cannot. If you are a community bank that is not offering these programs I strongly urge you to contact ICBAM to find out how you can. If keeping the loan in-house is not an option, help your borrowers by using the products available today.