Lenders tightening reins on second-home financing

While sales activity in the second-home market has been dinged by the loss of home equity in primary residences, leaders involved in second-home finance say the real problem lies elsewhere.

Bob Waun, managing director of Americor Mortgage/Vacation Finance and a board member of the Condo Coalition, an advocacy group for homeowner associations, said financing – not demand – is the reason vacation property sales are in the doldrums.

“Absorption has been exasperated by the lack of financing for echo boomers and baby boomers who wish to but cannot without significant cash outlays,” Waun said. “If we can fix the condo rules, we can fix the entire market. And, it will cost taxpayers absolutely nothing. All we need is some air cover.”

Lenders have increased their guidelines regarding second-home loans. Many now require a minimum down payment of 35 percent of the purchase price and discount the portion of rental income produced by potential renters. In addition, most lenders require that at least 70 percent of a condominium’s units be owner occupied.

One of the biggest gripes voiced by salespersons at the National Association of Realtors’ annual convention was the additional restriction involving condo association dues. In order to get a Federal Housing Administration loan in a specific building, no more than 15 percent of the owners in the complex can be behind on their dues.

“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 Vicki Cox Golder, NAR’s past president.

The GSEs, or government-sponsored entities, include Fannie Mae and Freddie Mac. Analysts believe the investors who buy Fannie and Freddie loans have increased their restrictions, or “overlays,” to a point where they shoulder no risk in making a loan.

The result? Mortgage money that was once too easy to get is now far too difficult.

“There is a lot of money out there,” said John Tuccillo, former NAR chief economist and now a national housing consultant. “The Fed has put $1 trillion into liquid reserves in banks. But for some reason, the money is not getting out. It is hard to get financing for real estate. The banks are uncertain about regulations and what is a good loan and a bad loan. There is a lot of disconnect in the liquidity of the system and interest rates, and the level of financing.”

There is still a small group of individuals who are not swayed by the availability of mortgage money, said Dr. Stephen Roulac, chief executive of Roulac Global Places, a San Rafael, Calif.-based consulting firm that advises senior management and investors in real estate affairs.

“There’s really no direct correlation at all,” Roulac said. “Most of the people who can afford a second home outside the United States are either going to be paying cash or have a variety of places they can get funding. The financing situation is not a factor for these people.”

Most housing officials are quick to point out that the cash buyer is an insulated segment of all housing – especially second homes.

“There’s an enormous link between home equity in a person’s primary residence and the second home market,” said Adam McAbee, senior manager and second home specialist for San Diego-based John Burns Real Estate Consulting. “If a person’s home was worth $300,000 and the market value is now $200,000, there’s no equity left to even consider a second home.”

David Collins, chairman of Active Living International, a company specializing in the research and development of active adult communities, is an expert in predicting where snowbirds prefer to land. He once said that an attractive development in the sun near the water with great access to an airport and priced at $400,000 would easily sell.

“Airlift is critical,” McAbee said. “But if the benchmark in 2007 was $400,000, it’s probably in the $200,000s now. I think it’s safe to say things have changed that much.”

Tuccillo said that overseas economies and housing appreciation – especially in China – are bringing more foreign buyers to American markets, even though length of stay is an issue.

“Domestically, I think we are saving more,” Tuccillo said. “Spending habits have changed from spending and consuming, to saving. That could mean a reduction in the demand for second homes. I am not saying it is fact. It is a theory. But there is evidence that it is happening.”