Triggers for rejection

Last year, more than two million people were turned down for homes, according to federal data, often because the applicants didn’t meet certain lender requirements or because their applications were incomplete or otherwise problematic. With lenders’ underwriting criteria becoming more rigorous in recent years, it’s important buyers know the most common triggers for mortgage-loan rejection.

Making sense of the story

• Insufficient income: Lenders want to be sure borrowers can afford to make the mortgage payments. Lenders typically look for at least a two-year track record of income, which could hurt those who have changed jobs recently.
  
• Cloudy financial picture: Generally, total debt payments, including the mortgage, cannot exceed 45 to 50 percent of a borrower’s adjusted gross monthly income. Overtime and bonuses are included only if the borrower has worked for the same employer at least two years, and has a history of receiving them.
  
• Poor credit: Lenders typically reject applicants with FICO scores below 620.
  
• Low appraisal: One of the predominant reasons buyers are turned down for home loans is because the appraisal on the property is too low. A buyer may think he or she is purchasing a house worth $800,000, but if the appraisal comes in less than that, the lender will not loan the borrower the money.
  
• Property problems: Sometimes issues turn up within a house, like a major repair or safety issue that needs to be addressed, before an application can be approved.
  
• Information mix-ups: Approximately 12 percent of new mortgage applications were denied because of unverifiable information or incomplete credit applications, according to the Federal Financial Institutions Examination Council.

Americans pessimistic about economy, home prices, household finances

Fannie Mae’s September National Housing Survey found that Americans are still very pessimistic about the economy, home prices, and household finances.  Findings also demonstrate that consumers are paying close attention to economic news and what policymakers are saying, and continue to link their personal financial situations with the current macro-economic environment.

“The lack of a sense of urgency to buy homes, given expectations for further declines in home prices and continued low mortgage rates, coupled with general pessimism regarding their own personal finances and the economy, bodes poorly for the recovery of the housing market,” said Doug Duncan, vice president and chief economist of Fannie Mae.

Highlights of survey include:

Americans noted a very large decline in their expectation for mortgage rates in September, with only 33 percent saying that mortgage rates will go up in the next 12 months (down 12 percentage points since August – the lowest number on record).
For the fourth consecutive month, Americans expect home prices to decline over the next year. On average, Americans expect home prices to go down by 1.1 percent, the highest expected decline to date. 
Only 18 percent of respondents expect home prices to increase over the next 12 months (the lowest reported number to date in the National Housing Survey), while 25 percent say they expect home prices to decline (down by 2 percentage points since August).
While 68 percent of Americans say it is a good time to buy a home (down 1 percentage point since last month), only 10 percent of those polled say it is a good time to sell one’s home (up by 1 percentage point since August).
Despite continued consumer caution about taking on a large financial obligation to buy a home, 63 percent say they would buy their next home if they were going to move (up by 1 percentage point since August), while 32 percent of Americans say they would rent their next home (down 2 percentage points since last month).
The number of Americans who expect their personal financial situation to worsen over the next year has decreased for the first time in four months (down from 22 percent in August to 19 percent in September).

Employment Picture Brightens:

While unemployment levels will continue to be a major concern and a drag on our economy, several reports showed some improvement last week.  This is the single biggest factor in housing.  Regardless of interest rates - people simply don't purchase homes when they are unemployed or are concerned about their employment picture.  This is why the following data is welcome news for the housing industry.

The headline unemployment rate remained unchanged at 9.1%, however economists are focusing on the improvement in the non-farm payroll data.

Non-farm Payrolls jumped up to 103K in September, from the revised previous month's result of 57K, the U.S. Department of Labor reported. The results considerably exceeded forecasts of 73K growth. The change in total non-farm Payroll employment for July was also revised upward from 85K to 127K.

Average Hourly Earnings increased to 0.2% in September, following a 0.2% drop in August. On an annual basis Average Hourly Earnings remained flat at 1.9% for the second consecutive month in September.

Average Weekly Hours increased to 34.3 in September from 34.2 in August, despite forecasts of remaining at the same level.

In a separate report, the ADP Private Payroll data which measures U.S. non-farm private business sector hirings increased by 91K in September, after rising 89K in August. This was higher than market forecasts of only a 75K increase.

Construction spending rises in August

Construction spending rose 1.4 percent in August to a seasonally adjusted annual rate of $799.1 billion compared with July’s estimate of $788.3 billion, according to the U.S. Census Bureau of the Dept. of Commerce. The August figure also is 0.9 percent above the August 2010 estimate of $791.7 billion.

Residential construction was at a seasonally adjusted annual rate of $237.8 billion in August, 0.7 percent above the revised July estimate of $236.2 billion.

Pending home sales decline nationwide in August

NAR’s Pending Home Sales Index (PHSI) declined 1.2 percent to 88.6 in August from 89.7 in July, but is 7.7 percent above August 2010. The Index is a forward-looking indicator based on contract signings. The data reflects contracts, but not closings.

The PHSI in the Northeast fell 5.8 percent to 63.6 in August, but is 1.3 percent higher than August 2010. In the Midwest, the index declined 3.7 percent to 76.2 in August, but is 8.2 percent above a year ago. Pending home sales in the South rose 2.6 percent to an index of 96.9 and are 7.6 percent higher than August 2010. In the West, which includes California, the index declined 2.4 percent to 108.1 in August but is 10.5 percent above a year ago.

“We continue to experience a pattern in which financially qualified home buyers, willing to stay well within their means, are being denied credit – a factor in elevated levels of contract failures,” said Lawrence Yun, chief economist for NAR. “Based on the improving fundamentals of population growth, some job additions, rent increases and higher stock market wealth, we should be seeing existing-home sales closer to 5.5 million, but are expecting just over 4.9 million this year. The unnecessarily restrictive mortgage underwriting standards are attenuating the housing recovery and are a risk factor for the overall economy.”

U.S. to lower the size of mortgage it will guarantee

The current conforming loan limit, which determines the maximum size of a mortgage that the Federal Housing Administration (FHA), Fannie Mae, and Freddie Mac can buy or guarantee – is set to expire Friday, Sept. 30.

Making sense of the story

• Beginning Oct. 1, the conforming loan limit will decline to $625,500, from the current $729,750 limit, though the majority of counties will fall far below the $625,500 maximum.
  
• Non-conforming or jumbo loans typically carry a higher mortgage interest rate than a conforming loan and require a higher down payment, increasing the monthly payment and negatively impacting housing affordability for California home buyers.
  
• Under the new GSE loan limits, Monterey County would see the greatest drop in the loan limit at $246,750, followed by San Diego ($151,250), Sonoma ($141,550), Solano ($140,500), and Napa ($137,500) counties.
  
  
• Under the new FHA loan limits, Monterey County would see the greatest drop in the loan limit at $246,750, followed by Merced ($201,450), Riverside ($164,650), San Bernardino ($164,650), Solano ($157,300), and San Diego ($151,250) counties.
  
• The CALIFORNIA ASSOCIATION OF REALTORS® (C.A.R.) estimates that more than 30,000 California home buyers statewide will be impacted by the change to the conforming loan limits.
  
• In anticipation of the conforming loan limit decline, some banks already have stopped accepting conventional and government applications for loan amounts that exceed the new permanent loan amounts.

California pending home sales increase in August

California pending home sales climbed in August from both the previous month and year, the C.A.R. reported this week. The year-to-year increase was the highest level since July 2009.
Pending home sales in California rose 7 percent from July, according to C.A.R.’s Pending Home Sales Index (PHSI). The index was 125.3 in August, up from July’s index of 117.1, based on contracts signed in August. The index was up 12.6 percent from August 2010. Pending home sales are forward-looking indicators of future home sales activity, providing information on the future direction of the market.

The report also includes information on distressed properties. In August, the total share of all distressed property types sold statewide inched up to 43.7 percent from July’s 42.9 percent. The share of distressed sales was lower from a year prior, when distressed sales totaled 44.5 percent of all home sales. Of the distressed properties sold statewide, 18.9 percent were short sales compared with July’s 17.5 percent share and last August’s share of 19.3 percent.

The share of REO sales was down from both July and a year ago. REOs made up 24.4 percent of sales in August, down from 25.2 percent in July and 24.7 percent in August 2010. Non-distressed sales made up the remaining share of home sales in August at 56.3 percent, down from 57.1 percent in July and 55.5 percent in August 2010.