NEW ORLEANS—Overlays are killing otherwise good deals, the leadership of the National Association of Realtors charged here earlier this month.
It’s bad enough that private lenders are making hardly any loans that are not insured by the Federal Housing Administration or purchased by the government-sponsored enterprises, they complained. But the underwriting restrictions lenders are placing on top of the government’s requirements are chocking off any chance of a housing recovery.
Overlays are “silly, stupid and inappropriate,” said Ron Phipps, the Warwick, R.I., broker who will head the 1.2-million-member NAR for the next 12 months.
Phipps, a 31-year real estate veteran, told reporters during a press briefing that lenders have gone too far to insulate themselves from risk.
“We need to get back to the middle so the market can do what it is supposed to do,” the Rhode Island broker said. “We need common-sense underwriting standards.”
FHA commissioner David Stevens agreed. Fresh from giving lenders a tongue-lashing at the Mortgage Bankers Association’s annual convention last month in Atlanta, he let them have it again here, saying that the extra protections put in place by lenders and investors are “restricting ownership and we need to do something about it.”
Stevens said there is something drastically wrong when the FHA allows buyers with a 580 credit score to qualify for government-insured mortgages but some lenders won’t approve would-be borrowers unless their scores are in the mid-600s or above.
During its week-long conclave, the politically powerful NAR adopted a new policy towards mortgage credit that calls on investors to reassess and amend their requirements so qualified borrowers can obtain financing.
Investors have “imposed so many safeguards that there is now little risk to making new loans,” the statement says. “The housing and mortgage markets have overcorrected, and one of the problems holding back the recovery is excessively tight credit policy.”
In trying to make up for the years of making loans to practically anyone who could fog a mirror, the statement adds, some investors have gone beyond risk layering to “safety layering where so many safeguards are being imposed that there is little risk to making new loans.”
The mission of the government’s housing programs “is being impaired by unnecessarily restrictive limits on the availability of credit, and these extremely tight credit policies are significantly delaying a housing market and economic recovery,” said 2010 NAR president Vicki Cox Golder.
“Stricter FHA and GSE underwriting rules eliminate many buyers with credit scores as high as 750, and lenders are imposing credit overlays of their own, restricting the availability of credit,” said Golder, a Tucson, Ariz., broker.
Overlays are particularly onerous when it comes to condominiums, according to several speakers here.
On a panel discussing resort and second-home opportunities, for example, Robert Waun, managing director of Americor Mortgage/Vacation Finance, a Birmingham, Mich.-firm that finances vacation properties, said the rules regarding condos are simply outdated and need to be redone.
“If we can fix the condo rules, we can fix the entire market,” said Waun, who noted that many buyers in resort markets are taking up permanent residence. “And it will cost taxpayers absolutely nothing. All we need is some air cover.”
Waun, who is on the board of the Condo Coalition, an advocacy group, said so many condo units sit empty, not for a lack of demand, but for a lack of financing. “Absorption has been exasperated by the lack of financing for echo boomers and baby boomers who wish to but cannot without significant cash outlays,” he said.
Even the FHA’s restrictions on condominiums came under fire here, especially the rule requiring that no more than 15% of a property’s owners can be behind on their condo association dues.
The NAR has asked the FHA to reconsider that dictum, which it complains is too harsh. In light of the current economic doldrums, the Realtors would like the agency to raise the threshold to a higher percentage of residents, or at the very least redefine the term “late” to 90 days behind instead of just 30.
“We’re hoping to see some changes,” said Jerome Nagy, a member of NAR’s legislative and regulatory policy staff. “Many condos are just not sellable otherwise.”
