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Lenders Nervous about Risk, Even If the Risk Isn’t You

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By Margarita Bauza

RISMEDIA, Dec. 5, 2008-(MCT)-Jerrid Mooney was pumped about closing on his condo several months ago. He was counting the days and telling his friends. He had 20 percent down and a credit score that he calls “stratospheric.” Yet hours before the Aug. 16 closing was scheduled to happen, the bank called it off.

“They said it was a non-warrantable condo,” said Mooney, 34.

He tried different lenders, but they all told him that the condo development he picked-which had many foreclosed units and a questionable association budget-was too risky. Given the foreclosures, the banks were unsure whether property values would hold for any period of time.

“There are a lot of foreclosures I know, but how do you spin that tide?” he asked.

For now, Mooney is giving up on his dream of buying a place at the Carlton, a 1920s hotel in Midtown Detroit. It was turned into lofts in 2005.

The property he wished to buy had sold for $270,000 and was foreclosed after its owner passed away. He was prepared to buy it for $114,000.

Mooney said he went to several lending institutions, all of which chose not to lend.

It is a problem that’s affecting depressed markets nationwide, said Dana Johnson, an economist with Comerica Bank. Lenders of all sorts are more cautious because there’s more risk that people will run into job losses, take hits on their income and have problems staying current on loans.

“The house is the collateral of the loan,” he added. “The safety of lending would look different if home prices stopped falling.”

Potential home buyers must find neighborhoods where property values haven’t fallen as drastically if they want a loan.

“A lot of people are finding that they’re going to need better credit scores and bigger down payments to qualify for loans,” Johnson said.

Matthew Adler, a mortgage specialist at North Star Home Lending who worked with Mooney, said his rejection was not his fault.

The developer had financial difficulties and left some contractors in the lurch. Contractors who weren’t paid put liens on the condos that the title company was not able to clear.

That problem could have been solved in a better credit environment, but lenders have gotten tough, particularly with condos, Adler said. “We’re seeing lenders treating condos as an added risk when underwriting loans,” he said.

Robert Rahal, president of Shore Mortgage in Birmingham, Mich., said condos are depreciating more quickly than houses.

“When you lose owners, you lose dues, associations fall into financial hardship, they can’t maintain properties, this in return impacts the value” of the unit, he said.

Some lenders are lowering the amount any buyer qualifies for by 5 percent just on condos. They are also looking at associations and the health of their reserves when choosing to lend.

“We are seeing lenders make lending decisions more on the collateral than the capacity of the borrowers,” Adler said.

Lenders often look at the number of condos sold in a particular development before they do a deal.

Some lenders have refused to lend money unless 51 percent to 90 percent of units have been sold in a development.

Mooney, meanwhile, has been living with friends until he can get a loan approved to move into the city.

Rahal agreed that banks are pickier about the location of the property than the buyer.

“When there are a lot of foreclosures within a mile radius, it drags down the overall value of that property,” he said.

When it comes to condos, Rahal advises potential buyers to look at the financials of the association before getting too far into the process.

Austin Black II, a real estate broker with Max Broock Realtors who specializes in Detroit, said the current situation means brokers must work closer than ever with lenders.

“The first people we start talking to are the mortgage people, talking to them about the property I’m dealing with and what’s expected of the client,” he said. “When you’re educated up front, we know what to expect ahead of time.”

© 2008, Detroit Free Press.
Distributed by McClatchy-Tribune Information Services.

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