Written by Our economy is in the rut, and much of it has to do with the housing crises. Prices have been relatively flat over the last few years, but there are still hundreds of thousands of foreclosed homes on the market, with many more to come in the future. Not only that, but underwriting standards have become so stringent, that a whopping 26% of loan applications have been denied as of lately. The beginning of recovery for the real estate market lies in the ability for our lenders to recognize qualified borrowers without the need of a giant, and in the case of the 26% mentioned above, undoable down payments.
First of all, underwriting standards are too tight. There are many qualified buyers that are being denied conventional loans because they do not have the big down payments required. Lenders are looking for more vested interest from borrowers in the form of large down payments when, according to a publication from the National Association of Realtors, “well-underwritten, low down payment home loans have been a significant and safe part of the mortgage finance system for decades.” Furthermore, studies have shown that the amount of the down payment has played a negligible roll in foreclosure statistic of loans that have been well-underwritten, whether that down payment be 5%, 10%, or 20%. Of the 26% of loans being denied, the vast majority of them are credit worthy borrowers that simply do not have access to the large down payments that are being required by the lenders in order to receive the interest rates they can afford.
By loosening these standards to allowed for well-qualified borrowing, we will begin seeing more people move into a home buying position. This will allow for more competition on these foreclosed home, which are already great deals. Think about it. If two people bid for a house, the home will be sold for greater than what it would have if one person would have made an offer. This will yield a higher final sale prices, which will begin driving up the price of other comps in the area. A neighborhood inventory can be benefitted by one good comp in the area, and the snowball effect that comes with it.
In conclusion, we need to begin moving more people into a position to buy. Desperate sellers are accepting first offer, most of which are underneath the list price, simply because they want to get rid of their home. This situation does not help comps in the neighborhood, but rather moved their estimated values down. The key to appreciation is allowing for homes to be sold above list price, stimulating appreciation and market appeal for homes in the area. This is accomplished by increasing competition, and that is done by loosening unnecessarily tight underwriting standards.
