As we wait for the closings to occur before we talk about the rush of late year sales around the lake, we should probably talk about loans. And lenders. And appraisers and their appraisals. To understand the lending climate today you must go all the way back to 2008 and then into 2009, when the world looked around for someone to blame for filling that housing bubble so full of that hot air. Realtors? We could have blamed them exclusively, but Realtors get blamed for everything in times good and bad, so Realtors weren’t going to do. Consumers? Please. You know we can’t ever blame consumers! Consumers are the infallible segment of any argument, the off limits jewel. Consumers as a collective can walk on water and should their feet get wet consumers can blame the water for being so darn wet. So, no, we can’t blame the mighty consumer.
Who was left? I would have blamed Ty Pennington, but that’s just me. Instead of blaming him or those people up there, the world decided that all of this was the bank’s fault. Never mind that the banks simply did as they were told by administrations and the Fed and the trade groups that needed housing to boom, none of that mattered then and it doesn’t matter now. The lowest common denominator of thought forces us to lay all of this at the dirty feet of those crooked corporations: The banks.
Once the culprit was identified, like, immediately, then the world set about punishments. There would be forced rhetoric from pundits and elected officials, demanding that the banks pay some reparations- though cram down principle reductions, or through loan modifications, or through some other magical measure. And when the banks foreclosed on properties, en masse, they were labeled heartless and cruel and conniving. These banks were the devil and we were the innocents, we consumers who are incapable of ever, ever committing any error. If we defaulted, it must, it HAS to be someone elses fault. Who me, default because I feel like it? Never!
This is what you must understand from back then in order to see why the lending today is the way it is. The world screamed at banks and told them to stop preying on the poor, vulnerable consumer. If you did something that you were told later was wrong, and then you were punished for doing so with increased regulations and penalties, and billions of dollars of losses that causes even lower stock prices, would you want to repeat the same mistakes? Would you, if you were told that you gave money to people who didn’t deserve it, continue to dish out that easy money to people who you thought sort of might not deserve it? Well, no, you wouldn’t. And this is what it’s like to be a bank in 2012, and it’s going to be like that in 2013 too. Oh, and probably 2014.
The issue I take with the banks is not one where I don’t understand them, because I do. It’s an issue that comes up time and time again at vacation home closings. Vacation home buyers, it should be no secret, generally have a little bit more money than the average Joe. This is why they’re looking for and then buying vacation homes. Unfair or not, the vacation home is not available to everyone. Unless you’re in Steinbach, Manitoba, then a nice camper on a campground constitutes a vacation home, but enough about my in laws. These vacation home buyers here sit at closings and they sign loan documents and they secure a mortgage for their shiny new vacation home toy. To get to that table in order to sign those documents? It’s pure hell.
For the most part. I hear stories of verifying this asset and that asset, and then narrative explanations as to why this bit of a retirement fund is structured like it is, and why, in 2008, you only gave your grandmother $10 for Christmas. But it was in $2 dollar bills! You say. Aside from these strange bits of verification that are now part of the loan process, they have one particularly annoying issue these days. Banks, it seems, like to question deposits. Deposits! They don’t like them so much, and I’ve seen two loans this fall where buyers are questioned not just on their spending habits and credit scores, but they are scrutinized and must explain these strange deposits into their bank accounts. How dare you deposit actual money! What sort of borrower do you think we want around here!? One that has actual, regular deposits!? This is what the bank says.
The appraisal process is similarly confusing. Appraisers were separated from their client banks through HVCC regulations, wherein banks and appraisers had to operate through third party vendors to place a degree of separation between them. The thinking here was noble- that appraisers would no longer be subject to the pressures they received from lenders to make properties appraise at values that might have been too high. That was the thinking, but what has happened instead is the rise of rogue appraisers. Appraisers are generally kind and accurate enough, but in my experience they can also operate as market cowboys, intent on showing the realtors and the buyers and the sellers what that negotiated price really should have been.
Yet for all this regulation, and aside from the cowboy appraisers who wish to operate with their own market realities, appraisal numbers still come in remarkably at or just a hair over the contracted price. I am building a home right now. It’s a nice home, but not a super fantastic home. The loan that I secured to build this okay home was based on an appraisal- an appraisal that just so happened to come in within 2% of the target value that I was seeking to build based off of. Never mind that that number was likely $150k below actual market value, I know better. But that’s a purchase mortgage, and if I were to be seeking a refinance of an existing loan, and I needed values to sort of reflect the market, I might be completely and thoroughly out of luck. Best of all, the HVCC rules don’t care much that your appraiser didn’t consider accurate comps, you can’t call him or her, and you certainly better not email them either.
This is the world of lending today. It’s not great. It’s not the worst, either. But next time you hear about banks not wanting to lend just ask yourself this: If you were the banks, and you had just spent your life being, in turn, yelled at for not lending, then yelled at for lending too much, then yelled at again for not lending, would you feel like lending? Me neither.