Why the Credit Pendulum Is Stuck at 'Stupid'
BOSTON — Inna Komarovskaya was ready to do her part to revive the economy: She found a “really cute” condo to buy.
Despite a good credit score, a six-figure income and an ample down payment, Dr. Komarovskaya, a recent dental school graduate, could not get a loan. Her mortgage broker told her she ran afoul of new rules requiring two years of sufficient tax returns from some home buyers, instead of only one.
“Everyone says this is a buyer’s market, but they wouldn’t let me buy,” said Dr. Komarovskaya, 30. “It’s not fair.”
Not fair, perhaps, but far from unique, brokers and agents say. The readiness of banks to sell foreclosed properties has led to rising home sales in some areas. But the traditional housing market, the one that involves willing buyers and sellers, is still dead, with transactions lower than they have been for decades.
The recession is the major reason sales are dragging, of course, but it is not the only one. As Dr. Komarovskaya found, buyers once viewed as perfectly qualified are being denied mortgages.
Brokers and bankers say that in past decades, the credit markets would almost certainly have accommodated many of these people.
“The credit pendulum is stuck at ‘stupid,’” said Lou S. Barnes, an owner of Boulder West Financial Services, a Colorado mortgage bank. “I am turning down loans every day that my grandfather in his Ponca City, Okla., savings and loan in 1935 would have been happy to make. And he was tough.”
The denials are occurring for a wide array of reasons: the buyers’ incomes are adequate but irregular; they are self-employed and take many deductions, reducing the taxable income on which lenders focus; their credit scores are below the cut-off point, which has been raised drastically; their down payments are less than 20 percent.
Housing usually leads the country into a recession, which certainly happened this time, and also leads it out — which will not happen in 2010, the real estate industry contends, without stronger efforts to thaw the market.
No one is advocating a return to the lax lending standards of 2006, when buyers with no income or documentation could get loans. But many people say they believe lenders and the government, in correcting the excesses of that era, have gone too far in the other direction.
Fannie Mae, the government-controlled company that buys mortgages, is so dominant in the lending market that its rules set the standard. It recently toughened its policies, saying it would count only 70 percent of the value of stocks and mutual funds when calculating a buyer’s assets. Previously, that figure was 100 percent.
A Fannie spokesman, Brian Faith, said tighter regulations screened out those unprepared to be owners.
“One of the important lessons learned in the past few years is that it is not enough to help a borrower own a home,” Mr. Faith said. “We must also help ensure that they will be able to stay in the home over the long term.”
Mortgage brokers say those who are being rejected for loans are often entrepreneurs who are used to taking risks. “They are chomping at the bit to get into this market, but are forced to the sidelines,” said Stuart Fraass of Guaranteed Rate. “If you’re self-employed, you have virtually no chance of getting a mortgage now.”
Mr. Fraass was unable to help Raghbir Singh, a real estate investor who owns a gas station in Dover, N.H. Mr. Singh tried to buy a $301,000 house for himself and his family with 10 percent down and excellent credit, but was rejected. “It was unfair,” Mr. Singh said. “I’m a good risk, but I’m forced to rent.”
Sales of Foreclosed Homes
Lately, the continued deep-freeze in the traditional market has to some extent been veiled by the brisk sale of foreclosed houses. In April, distressed transactions made up nearly half of all existing house and condo sales, the National Association of Realtors said. In May, they were a third.
That means traditional or so-called move-up sales, where the parties at both ends of the transaction are individuals instead of banks, are limping along at an annual rate of about three million, the lowest figure in a quarter-century.
“Without further action, we’re not going to stabilize,” said Steve Murray of Real Trends, a Denver research group. “The real estate recovery will take 10 or 12 years.”
There are plenty of plans to unlock the market.
Members of Congress are proposing to extend and enlarge an $8,000 credit for first-time buyers, which is due to expire in December. One bill would extend the credit to all buyers through next June. Another would extend it to all buyers through 2010. A third bill would expand it to $15,000 for all buyers.
Some economists, noting that tax incentives helped stoke the boom, say these proposals should be shunned. “When do you decide enough is enough?” said the housing consultant Ivy Zelman. “I don’t want to feed the drug addict with more drugs.”
The continuing deterioration in traditional real estate can be seen in the market in Massachusetts, where the economy, as measured by the unemployment rate, is better than in the nation as a whole.
Yet sales of single-family homes in Massachusetts in May were tied for the lowest level for the month in the 22 years since reliable statistics were first assembled, according to Timothy M. Warren Jr. of the Warren Group, which collects real estate data. Condo sales were only marginally better.
As bleak as those numbers may be, they do not fully convey the troubles here in the upper half of the market. In towns where the median home price is above $500,000, sales during the first five months of the year were 21 percent below the level of 1990, when the state’s population was smaller and the local economy equally in crisis.
Real estate agents, always optimistic, had looked for some recovery this spring, the strongest season in the Northeast. Mr. Warren said he was more pessimistic, but was disappointed anyway. “There’s a lot of pent-up demand, but it takes nerves of steel to buy,” he said.
Dr. Komarovskaya, the rejected dentist, tries to be philosophical about missing out on that two-bedroom condo she wanted in the Dorchester neighborhood of Boston. She understands that after years of mortgage abuse and fraud, the rules had to be tightened.
But what might be an inevitable process in the larger economy is a burden on her personal finances. “Renting is a waste of money,” she said. Having no choice, she has dropped plans to buy and signed a new apartment lease.