Is it Harder to Get a Loan?

The Federal Reserve recently published their quarterly survey of 84 banks. The survey asks each bank to summarize it's trends and lending standards and if each bank's lending guidelines are becoming more or less restrictive.

About 75% of the surveyed banks said their standards have tightened for residential mortgage loans. To quote the somewhat dry language of the report, "Large majorities of domestic respondents reported having tightened their lending standards...over the previous three months. About 80%...noted that they had tightened their lending standards...for revolving home equity lines of credit."

Based on what I hear from clients and friends on the banking side, the percentage will probably approach 90% next quarter.

The Fed and Our Market

The Fed’s move to lower the federal funds rate by 50 basis points, while expected, was well received. Bernanke (The Federal Reserve Chairman) said the Fed “…took that action to try and get ahead of the situation.”

Congress may raise the conforming loan limit for Fannie Mae and Freddie Mac. They are currently prohibited from buying loans greater than $417,000. Larger “jumbo” loans are sold in the secondary market where the turmoil from the “sub-prime” crisis has caused a great deal of problems. The thought is that allowing Fannie Mae and Freddie Mac to buy higher priced loans from lenders will calm the waters and provide liquidity.

Bernanke isn’t enthusiastic about the proposal and Treasury Secretary Paulson supports the idea only if it is temporary and if there are regulatory changes as well.

How Does the Mortgage crisis and faltering markets elsewhere affect Pebble Beach and Carmel?

Our market is impacted in the following ways:

• Most buyers coming to Pebble Beach and Carmel are “buying up.” They have sold a primary residence, or second home elsewhere, and are excited about achieving the dream of a home in Pebble Beach. For the prospective Pebble Beach buyer to “buy up”, someone else down the ladder needs to “buy up” to their current home. So, a faltering market in Fresno makes it difficult for that Fresno owner to sell and move here.
• Many buyers in our area took advantage of “no-doc” loans. Most were well qualified buyers that might have had “lumpy” income streams such as fluctuating income from owning their own business. The rules have tightened and most “no-doc” loan programs are gone.
• Buyers calculate the cost of owning a home including rising interest rates and taxes (which have climbed along with home prices.) A few years ago, they might have included substantial appreciation in their calculation. While appreciation over the long term is still attractive, it will be far less than in past years.