What's behind the high fallout rate for mortgage contracts?
An approved mortgage loan application form.
The last time Dick Eisman bought a house, he told himself he would never move again. But just a few days ago, he and his wife made an offer on this three-bedroom Craftsman bungalow. That, after the realtor showed him pictures of the wild elk that roam the forest that runs up against the backyard.
"One of the things that we talked about was storage," he said, inside the garage of a house he did't even own yet, trying to figure out where to store the Christmas decorations. "And I think now looking at it, yeah, this would be perfect."
Just a few months ago Eisman was doing the same imaginary moving exercise in a completely different house. But the deal fell apart when the couple that was going to buy the Eisman's house backed out.
"And when they backed out, we could not complete the contract with the house that we offered. You know, it was kind of like dominoes. As soon as one fell out then everything fell out," said Eisman.
Economist Paul Diggle says broken housing contracts aren't new; they're just happening more frequently. Diggle studies the U.S. housing market for the research firm Capital Economics. He says it used to be that about 1 in 20 pending sales would fall through before closing -- usually after the home inspection turned up something unexpected like lead paint or termites. Diggle says right now the fallout rate is much higher, closer to 1 in 5. For one thing, he says, lenders are still skittish. Remember how the whole global banking system teetered on the brink of systemic failure? But he says buyers are ready to go.
"So they're signing contracts, but when it comes down to the last stage... they're finding they aren't being approved for that mortgage," he said.
Sandy Garner runs a real estate company in Bend, Ore., and says the scrutinization is a little bit overboard, but she doesn't want to see it go back to the way it was. While the housing bubble was inflating, Bend saw one of the hottest markets -- and heard one of the loudest pops when it burst. The average price of a home in Bend dropped more than 50 percent. Now buyers are finally coming back, says Garner, to a very different market -- one that moves much, much slower.
"We might write for a 45 day close, try to keep the banks moving, but in reality it might take a little bit longer than that," said Garner.
For some of her clients, that's about as appealing as a 45-day trip to the dentist. Some people just walk away and start over again. Garner says that's especially true in short sales where closing can drag on for months on end. But it's not just tighter lending standards slowing down the process. Brian Liebman, a senior loan officer with directors mortgage, also lives in Bend. An independent mortgage broker, Liebman makes loans to homeowners much like banks do. He says after the bubble burst, the entire mortgage industry had to downsize. He estimates only 10 percent of the independent brokers who used to do business in Bend are still open.
"If you think of 90 percent attrition and now mortgage applications increasing, there's a lot less of us to handle that kind of load. The people that are left are busier than they've ever been. Things just have to slow down," he said.
Still, home sales are up, which suggests many buyers whose deals fell though didn't give up. Back at that charming craftsman/bungalow, Dick Eisman admits he was disappointed when he lost out on that first house. But now he thinks it was for the best.
"The other house was very nice and it would have done just fine, but this one just sings. It just feels like it's the very right thing," said Eisman.
Of course, he still has a few weeks before his closing date. There's always a chance he could change his mind.