Lenders including BankUnited, a unit of BankUnited Financial Corp., and Vertice, a wholesale lending unit of Wachovia Corp., have elected not to lend to some areas or properties because of declining prices. Countrywide Financial Corp., the nation’s largest mortgage lender, considered a similar move last week before reversing course, and other lenders have tightened underwriting guidelines for slumping markets so as to make financing nearly unattainable.

There are "lists circulating" from banks, says Peter Zalewski, a broker with Condo Vultures Realty LLC, and those lists are pushing down prices when news of the black-marked properties spreads.

Moreover, the blacklisting isn’t always obvious. "We don’t call it blacklisting," said an official at a large bank. "We just don’t write the loan."

The banks are acting to protect themselves in a steep downturn. But the drying up of loans threatens to create a self-perpetuating cycle.

"If mortgage credit dries up, then prices are going to fall more," says Morris Davis, a professor of real estate and urban land economics at the University of Wisconsin-Madison’s School of Business and a former economist at the Federal Reserve Board.

Countrywide sent shudders through the ranks of mortgage brokers when it sent brokers an email recently under the heading "Urgent Product Elimination." The message announced the company would stop approving its Fast and Easy and Alt-A mortgages for all high-rise condominiums nationwide, effective almost immediately.

Countrywide’s Fast and Easy loans don’t require verification of income, brokers said. Alt-A loans are generally provided to buyers with good credit who lack full documentation.

Countrywide reversed its policy a day later without explanation, but the episode demonstrated lenders’ reluctance to underwrite mortgages in the country’s most uncertain real-estate markets. Countrywide didn’t respond to multiple requests for comment.

Florida’s largest bank, BankUnited Financial Corp.’s BankUnited FSB, drew up a "nonpermissible condominium project list" that identified addresses of 191 condominium developments in Florida and Las Vegas for which the bank won’t provide financing. The list was reported by the South Florida Business Journal.

For more than half the properties listed in the memo, the bank cited "declining market value" as the reason it wouldn’t provide financing. Melissa Gracey, a spokeswoman for BankUnited, confirmed that the list is still in force and said the bank’s "very conservative" lending guidelines rule out mortgages for such properties.

In some cases, lenders have blacklisted not specific properties, but entire geographical areas.

In December, Wachovia’s Vertice unit stopped writing mortgages for all condominiums in South Florida, says Kasey Emmel, a company spokeswoman.

Wachovia’s main lending operation "continues to offer condo products in all markets, including Florida markets," says spokesman Don Vecchiarello.

Blacklisting isn’t redlining — the illegal practice of restricting lending on a socioeconomic basis — so it doesn’t run afoul of fair-lending laws, says Alexander Bono, a partner at Schnader Harrison Segal & Lewis, a law firm in Philadelphia. Banks are allowed "to identify a county when it’s based upon something other than socioeconomic conditions" and then change its stipulations for lending there, Mr. Bono says.

Even when banks haven’t officially ruled out entire markets, the stipulations they use before lending in such areas are becoming very stringent, and can leave mortgage credit all but off-limits.

"Companies won’t lend" money for purchases in developments that aren’t at least 60% filled, says Paul Miller, an analyst at Friedman Billings Ramsey & Co., a unit of FBR Capital Markets Corp. When vacancy rates in a development are higher than 40%, Mr. Miller says, "your condo fees go through the roof," since a development’s minimum maintenance costs remain static, regardless of the number of residents. And if condo fees remain high — as underwriting logic follows — then homeowners may have a harder time making mortgage payments.

"We’re very cognizant of the risks involved" with "condominium developments in particular," says Terry Francisco, a spokesman for Bank of America Corp.

Other larger lenders have also tightened standards for mortgages they write in declining regions.

In December, Fannie Mae, the nation’s government-sponsored mortgage-lending behemoth, issued an announcement titled "Maximum Financing in Declining Markets."

"When a property is located in an area identified as declining," the announcement says, the lender originating the loan must reduce the maximum amount it could otherwise lend to that buyer by 5%.

In healthy markets, New York’s J.P. Morgan Chase & Co. will currently lend borrowers a mortgage equal to as much as 90% of a property’s value. For borrowers in states that have declining markets, however, the bank reduces that maximum, says Tom Kelly, a spokesman for the bank. J.P. Morgan then reduces that level even further for borrowers in the worst declining markets, Mr. Kelly says, though he declined to provide specifics.

CitiMortgage, a wholesale lending operation of another large Wall Street bank, Citigroup Inc., maintains a list of "declining market areas" that red-flags dozens of counties in more than 10 states. Citi reduces the amount it will lend for properties in those counties "by at least 5%," the document says.

"We routinely review our credit parameters, including maximum loan-to-value ratios, in declining markets," says Mark Rogers, a CitiMortgage spokesman.

One silver lining: For "all-cash buyers," Mr. Zalewski says, the lists are "heaven sent."

Buyers who have cash "can use that to negotiate," he says: "If you don’t sell to us, who are you going to sell to?"

Source:

Dawn Wotapka and Marshall Eckblad
From The Wall Street Journal Online
March 06, 2008

Please! Before trying to pass new laws Washington should look at the “Elephant in the Room.” I am not taking away the fact that there are bad people in every industry… including politics. What I’m saying is start with the biggest problems and work down to the smaller issues.

Matthew 7:3-4
”Why do you look at the speck of sawdust in your brother’s eye and pay no attention to the plank in your own eye? How can you say to your brother, ‘Let me take the speck out of your eye,’ when all the time there is a plank in your own eye?

The speck is over valuation by appraisers.
The plank is lending practices and guidelines dictated by Wall Street Investment Banks.

Values spiraling upward had much less to do with appraisers over valuing property and more to do with lending guidelines and consumer sentiment. Just look at the types of loans originated.

- Prior to 2002 – Amortized, Fixed Rate, Verified Income – people could qualify
- 2003 Amortized, Fixed Rate, Stated Income – people had to fib on income to qualify
- 2004 ARMs, Stated Income – people had to fib on income and take a lower initial payment to qualify
- 2005 Neg Am & Interest Only ARMs, 100%, Stated Income – people had to outright lie about income and take low initial payments. Underwriting became about reasonableness of stated income… is it reasonable for the McDonalds fry guy to make $5,000/mo?
- 2006 Neg Am & Interest Only ARMs, 100%, No Income – The income lie became so ridiculous that lenders said don’t lie in fact don’t put any income.

The simple math behind the melt down is that Lenders/Wall Street designed loan programs that were easy to qualify for and had an affordable initial payment. This allowed more people to buy and more people to buy multiple properties. The availability of easy money and consumer sentiment of “get in before it is too late” caused high demand and less thought about affordability after the teaser payment. More demand leads to higher prices, higher prices leads to sentiment of “get in before its too late”, which leads to more demand. What Law Makers are proposing would is in Jesus words, removing the speck while ignoring the plank.

Of course the sad irony… Lenders/Wall Street Investors are getting bailed out by the Government!

Colin Wright.

HUD has released a document, 24 CFR Parts 203 and 3500 Real Estate Settlement Procedures Act (RESPA): Proposed Rule To Simplify and Improve the Process of Obtaining Mortgages and Reduce Consumer Settlement Costs; Proposed Rule.

HUD is looking for comments and/or suggestions before deciding to implement it.

The first thing one notices is that this proposal to simplify is 96 pages long. The current RESPA rules already cover what they are trying to “simplify”. Clear disclosure of costs and terms and disclosure of yield spread premiums are already required by the current regulations. HUD states “The mortgage industry has changed considerably since RESPA was enacted in 1974, and the regulations implementing RESPA’s original disclosure requirements are no longer adequate.”

Having been in the industry for over 20 years, I can tell you that the mortgage industry has not changed all that much. Loans still cost money, and it is either paid for by the borrower or by the lender in the form of a yield spread premium.

HUD thinks that their current RESPA rules do not facilitate shopping or competition to lower the costs of getting a loan. I say that, if properly prepared, the Good Faith Estimate (that is already required to be provided by the lender or mortgage broker within 3 days of taking the loan application) is an excellent tool to use in comparing loans. It is lenders and brokers that do not properly prepare this document that make it difficult to compare loan to loan. If the current regulations were enforced, a modification would not be necessary.

This proposal states:

HUD’s regulatory reform and enforcement efforts for RESPA remain guided by the following principles:

1. Borrowers should receive loan terms and settlement cost information early enough in the process to allow them to shop for the mortgage product and settlement services that best meet their needs;

2. Costs should be disclosed and should be as firm as possible to avoid surprise charges at settlement;

3. Many of the current problems arise from the complexity of the mortgage loan settlement process. The process can be improved with simplification of disclosures and better borrower information;

4. Increased shopping by borrowers will lead to greater pricing competition, so that market forces will lower prices and lessen the need for regulatory enforcement;

5. The key final terms of the loan a borrower receives should be disclosed to the borrower in an understandable way at closing; and

6. HUD will continue to vigorously enforce RESPA to protect borrowers and ensure that honest settlement service providers can compete for business on a level playing field.

Let me address these issues one by one:

1. Borrowers are already supposed to receive the loan terms and costs early in the process. As for shopping for settlement services, this is only allowed on a refinance. In a purchase transaction, it is always the seller’s choice of escrow and title service providers. In addition, most borrowers would not know where to start in seeking out alternate settlement services. Those that do are and should be allowed to specify their choice. Good brokers and lenders accommodate their customers’ desires.

2. Costs over which the lender/broker have control are generally quite firm, and should only change if there is a change in terms, i.e. buying down the rate by paying a discount fee that was not initially requested by the borrower.

3. The currently required disclosures are as user-friendly as they can be, given the admitted complexity of the process, with the exception of the Truth-In-Lending form. That is one document that confuses every borrower I have ever dealt with. A change to that would be welcome.

4. If this goes into effect, borrowers will have no greater ability to shop than they have right now. I have dealt with many serious “shoppers” in my career, and I have dealt with many people who are not interested into putting that much energy into the process. People will still be people and these changes will not improve that.

5. The key final terms of the loan a borrower receives at closing are clearly spelled out in the most basic document of the loan set, the Note. It spells out the amount borrowed, the interest rate, the payment amount, and when payments begin and end. If the loan is of an adjustable nature, the Note is called an Adjustable Rate Note. Those, too, clearly spell out the terms of the adjustments, when and how much. In addition, there is usually an Adjustable Rate disclosure that reiterates the terms.

6. HUD does not need any new regulations to be able to enforce the current regulations. If they simply enforce the rules that are already in place, that would serve to level the playing field. It is unscrupulous brokers that do not disclose their true fees until the closing table that take loans away from honest agents who do properly disclose. Unfortunately, but the time this is found out, most borrowers are so anxious to get the loan closed that they bite the bullet and sign anyway. If more borrowers walked away from the closing table and reported the offending brokers, HUD would have an easier time enforcing the existing rules. That is the key to leveling the playing field.