Most people in the real estate industry would consider developing and selling in some of the nation's finest resort and retirement communities to be the pinnacle of their career. Nice people, nice property and nice income are all positives.
But, in recent years, the bloom is off the rose because willing, wealthy buyers cannot find willing lenders for jumbo loans. While the secondary market for these loans is improving, it is not the primary problem. The reasons relate more to constipated underwriting and to property appraisals.
Professionals who sell property and homes to very-high-net-worth individuals say that they now have to close every deal three times. The first closing is with the buyer, the second is with the appraiser and the third is with the lender. It isn't a wonder that the real estate market is depressed.
Consumers seeking jumbo construction loans and permanent mortgages must be prepared for a long, arduous underwriting process that typically takes two to three months. Those seeking lot financing must be prepared for a flat no.
While land and homes are still good assets, lenders have taken draconian measures to remedy problems they themselves, and a complicit government, have created. Rather than make adjustments to fix this problem and move ahead, they have thrown out the baby with the bathwater.
Now, lenders are guarding the balance sheet, executives are guarding their place in the hierarchy, Congress is passing new laws to gain further control of banks and the consumer is collateral damage.
At one coastal South Carolina resort development that sells high-value land (in excess of $600,000 per lot) to consumers who want to build high-value homes (in excess of $2,500,000) who average $900,000 in adjusted gross income, have liquid assets averaging $4,500,000 and credit scores north of 750, nearly 40% of deals are declined in today's lending environment. This is having a negative effect on the way these choice clients view banks, and the problem seems to be growing.
So, what can and should be done?
Senior bank management should lead by getting out of the office and back in touch with consumers. The hubris in the senior management of banks is so palpable it can be scraped off the walls. Now would be a good time for them to get over that and communicate with their customers.
Authority, commensurate with responsibility, needs to be pushed back down from the very top levels of banks to the lowest level possible. Responsibility cannot be delegated without authority.
The credit function must be decentralized, and be part of the solution. Loans should never be made to people the underwriter doesn't know, in places they've never been.
The appraisal process must be completely retooled. Banks are using third-party firms to assign appraisals to appraisers with no regard for their market knowledge or experience, and the product that they are generating is markedly worse.
Lenders are fearful that, if they use some level of common sense in establishing appraisal procedures, a lawsuit could be waiting in the wings. Fact is, probably the opposite is true.
The entire credit function within banks needs to be, once again, a support unit. They should analyze credit requests and make recommendations, period. Right now, credit is driving the banking train, without a view for long-term growth or client satisfaction.
Mortgage lending management needs to quit tinkering with incentive compensation plans based upon a product du jour. The same could be said for banking in general. If consumers knew that the product or products that are being recommended by their lender or banker are highly slanted toward a commission or incentive plan, they would probably rethink their relationships. Already, mortgage origination commissions are under being scrutinized for this practice.
Finally, lenders are relying on credit scores, at an unprecedented level, to make loan decisions. They eliminate many credit requests or charge higher rates and fees on the basis of the score.
This should stop. The problem with this is that most credit reports are rife with errors that could be fixed or easily explained if the underwriters were willing or able to take the time. In fact, based on my considerable experience, a large majority of credit reports have errors that have a negative impact on a borrower's credit score.
People are paying a great deal of attention to lending pratices and the federal government these days, and onerous underwriting standards for mortgage, lot and construction loans is now the number one problem area for those of use who develop and sell residential real estate. If the banking industry does not respond with some leadership, then a number of smart and resourceful people are going to find ways to fill the gaps.