Anthony Andrade was forced to rent the San Antonio, Texas home he planned to buy after Bank of America Corp. approved a mortgage and then scuttled three closings over two months with last-minute document requests.
“It was crazy,” said the 54-year-old Army veteran whose travails ended Jan. 10 after he switched to a local mortgage broker who got the loan backed by the Department of Veterans Affairs approved. “My wife was in tears because I had to sign the same things over and over. If we were superstitious people, we would have thought this house was not meant to be ours.”
The loose lending that fueled the real-estate boom has given way to underwriters amassing paper trails to justify loans to even the most creditworthy in a process home-loan buyer Fannie Mae’s chief economist calls “the mortgage inquisition.” The Mortgage Bankers Association forecasts that refinancing may drop 32 percent this year to $583 billion from 2011, even as the Federal Reserve pushes borrowing costs to record lows and President Obama urges steps to remove obstacles for homeowners.
“It suppresses a recovery,” said Anthony B. Sanders, a professor of real-estate finance at George Mason University in Fairfax, Virginia and former head of mortgage bond research at Deutsche Bank AG. “The pendulum has swung from one direction to another. We’ve gone to outrageous red tape.”
Obama said yesterday he will ask Congress for legislation to clear barriers to help more homeowners refinance into lower-rate loans, even with limited documentation. The plan may reduce annual home loan payments by about $3,000 for the average household, Obama said.
It will “help millions of responsible homeowners who make their payments on time but find themselves trapped under falling home values or wrapped in red tape,” Obama said in Falls Church, Virginia. The proposal doesn’t call for changes to the underwriting of loans for home purchases.
Lenders have solid financial reasons for their caution these days. About 90 percent of new home loans are part of programs in which government-supported mortgage guarantors Fannie Mae and Freddie Mac and U.S. agencies, including the VA and Federal Housing Administration, are supposed to bear default risks. The catch is that lenders can be forced to repurchase loans if they make underwriting mistakes.
That’s a key reason behind tighter lending, according to a Federal Reserve paper that Chairman Ben S. Bernanke sent to Congress in January.
Bank of America, based in Charlotte, North Carolina, said last month that unresolved demands from investors who accuse the company of selling defective mortgages jumped 22 percent in three months to $14.3 billion. Total outstanding demands on lenders by Washington-based Fannie Mae and Freddie Mac in McLean, Virginia stood at $12.2 billion as of Sept. 30, according to their securities filings.
Concern that delinquent loans will prove costly for servicing departments is helping to constrain lenders, according to the Fed paper, as regulations meant to ensure borrowers better understand loan terms and fees also serve to delay transactions.
“I call it the mortgage inquisition,” said Douglas Duncan, Fannie Mae’s chief economist. What’s changed “is the massive amount of documentation that now must be done against the potential legal liabilities in the system. That’s what makes it feel that it’s that much harder.”
‘No Doc’ Loans
The benefit is that new loans are performing well because lenders have tightened their standards in the wake of the era of “no doc” loans that didn’t require borrowers to prove income or even that they had jobs, Duncan added. About 5 million properties were lost to foreclosure since 2006, according to RealtyTrac Inc., an Irvine, California-based data seller.
Andrade, a real-estate agent, said Bank of America asked for an extension three times, one or two days before settlement, seeking revised inspection reports and bank statements and employment verification information that he had faxed earlier.
While none of the requests were out of the ordinary, they should not have come in just before the scheduled closing, Andrade said.
The lender is “focused on improving efficiency and continues to add resources to its fulfillment process in order to improve the experience for our customers,” Bank of America spokesman Terry Francisco said in an e-mailed statement.
Analysts at Citigroup Inc., Credit Suisse Group AG and Morgan Stanley see little chance of Obama’s latest plan succeeding amid a divided Congress. House Speaker John Boehner, a Republican, told reporters the plan won’t work, after at least four government initiatives to help homeowners failed.
About 900,000 borrowers with loans in private securities might be eligible, and benefit from one part of the proposal requiring legislation, according to data from Amherst Securities Group LP analyst Laurie Goodman.
Bondholders expect limited results from an attempt last year by Obama to expand refinancing for mortgages backed by Fannie Mae and Freddie Mac. Fannie Mae’s 6 percent securities, which would be damaged by homeowners refinancing into lower-cost loans, have risen almost one cent on the dollar since Nov. 14, according to data compiled by Bloomberg.
Sales of previously owned U.S. homes have declined 36 percent since 2005. Even as transactions rose for a third month, climbing 5 percent to a 4.61 million annual rate, the National Association of Realtors said Jan. 20, contracts are increasingly falling through.
In a survey of about 3,000 Realtors in December, 53 percent of respondents said they’ve had at least one transaction delayed or canceled in the previous month, up from 35 percent a year earlier, according to Walter Molony, a spokesman for the National Association of Realtors.
Members reporting contract cancellations jumped to 33 percent in December from 9 percent a year earlier. While the top factors cited were appraisal and mortgage problems, other issues included a job loss or credit score drop before the scheduled closing, he said.
Lenders are holding up deals with requests for years-old bank statements, canceled checks and updated paperwork, said Casey Williams, an agent for Essex Homes, a Lexington, South Carolina-based homebuilder, who now refers to scheduled closings as “target” dates. “Closing on time is like playing darts and trying to hit the bull’s eye,” he said.
‘Ultra-High Credit Score’
Having an “ultra-high credit score” and multiples of the loan amount in personal assets didn’t mean things were easy when Ryan Carlson, a 31-year-old independent trader of futures contracts, started refinancing in July, he said. When he was questioned about cash he’d deposited in his bank account when he closed a brokerage account, he said he figured documents showing debits and credits in the same amount on the same day would be sufficient. They weren’t. “I had to chase more documentation,” he said.
A client of Brian Tata, a mortgage broker in Warwick, Rhode Island, was required to come up with the canceled check to show the source of a $1,000 annual payment from his parents to help cover their grandchild’s school expenses.
One homeowner was asked to explain why he lived in Maryland and worked in bordering Virginia, a common commute in the Washington, D.C. area, said Ray Romano, Freddie Mac’s chief credit officer through mid 2011, of an acquaintance.
Chris Neuswanger, who runs the Vale, Colorado office of mortgage broker Macro Financial Group, has had closings delayed after settlement documents listed the name of the lender funding a mortgage as ending with a “Co.,” not “Company” and because paperwork listed a condominium unit as both “4-B” and “B-4.”
Often, the process can take so long that underwriters may request fresh appraisals.
The “new world order” damages both housing demand and financial companies, said Cliff Rossi, executive-in-residence at the University of Maryland’s Robert H. Smith School of Business.
“People talk to each other, so it impacts perspective borrowers, particularly first-time homebuyers who say, ‘It looks like an insurmountable process for us to qualify, so why even bother trying?’,” Rossi said. “It also certainly doesn’t help banks’ reputations” in general, he added
Rossi was a senior risk officer at three of the largest mortgage lenders -- Countrywide Financial Corp., Washington Mutual Inc. and Citigroup Inc. -- during the boom that has since given way to a slump that S&P/Case-Shiller index data show wiping about 33 percent from U.S. property values.
First-time buyers fell to 31 percent of transactions in December from 35 percent in November; they were 33 percent in December 2010.
Buying Too Complicated
When asked about the “major” reasons they haven’t yet purchased a property, 26 percent of renters listed, “The process of buying a home seems too complicated” as an issue, according to a survey conducted for Fannie Mae from July through September.
The U.S. homeownership rate fell to 66 percent for the quarter ending Dec. 31, as low as 1998 levels and down from a peak of 69.2 percent in December 2004, according to a U.S. Census Bureau report.
The Fed has strengthened rules on disclosures of loan terms under the Truth in Lending Act, while the Department of Housing and Urban Development beefed up those for closing costs, known as Good Faith Estimates. Lenders must send updated disclosures as items change and can’t close until three days afterward.
The changes forced a wait for one of Neuswanger’s clients in Colorado after a borrower’s annual percentage rate on their adjustable-rate mortgage declined following a drop in the index it would track, he said.
While not all originators believe that offering a better rate requires re-disclosure, some do, said Matt Woods, president of Genpact Mortgage Services. Woods, whose firm does outsourcing work for lenders including two of the top five, said it would be good if borrowers could waive the waiting periods, especially after being scrutinized by underwriters.
“Every document you provide seems to lead to another document we need,” he said.
The situation is “clearly harming the housing recovery,” said Christopher Mayer, a real estate professor at Columbia Business School in New York.
“People do read the paper and talk to friends and understand how rough this process is,” he said.
Richard K. Green, a real estate professor at the University of Southern California in Los Angeles, said his own refinance took about four months and required a new appraisal because so much time had elapsed from application to approval.
Appraisals, which already lag the market during a recovery because they depend on completed comparable sales, have been dragged down by all-cash sales, he said. Cash buyers, who account for about a third of sales nationally, typically pay about 8 percent less, Green said.
“I’m all for well-documented loans, but you can confirm the documents in a pretty short period of time,” Green said.
Bob Buie, senior vice president of loan originations at Midland Mortgage Corp. in Columbia, South Carolina, says the banks he sells his mortgages to now require his underwriters to pull an updated credit report for each borrower 48 hours before closing.
“I tell my clients that ‘this will be the most trying, tedious process you’ve ever been through in your life,” Buie said. “We can no longer use the ‘reasonable man’ method of documentation and approving loans. We have verifications to verify verifications that verify verifications.”