CU Mortgage Lending Hit by Cash Sales
In South Florida, 69% of all home sales this summer were cash, with a statewide rate of 66% according to data from RealtyTrac.
It doesn’t take a Harvard MBA to figure this must impact lenders, who obviously aren’t writing loans on these homes. Talk to some Florida credit unions, and they’ll confirm the trend is hitting not only the mortgage department, but members who have squirreled away down payments as they anticipate buying their first home.
The story keeps repeating itself: potential homebuyers find their dream home, offer full price, and sometimes within hours learn the seller has rejected their bid in favor of an even lower all-cash offer that will speed the closing.
Large retirement communities in Florida such as The Villages and Sun City Center have for some time seen as many as 80% of their home sales made for cash. It has made sense. Retirees pay off their home, sell it and put the money into a house in Florida. They don’t want to go into retirement with a mortgage.
Now cash deals are reaching into the entire market. Doug Leever, mortgage loan manager at $724 million Tropical Financial Credit Union in Pembroke Pines, Fla., is at ground zero for this trend.
Has he been seeing a large number of cash sales?
“Absolutely,” he said. “There are a lot of investors in South Florida buying homes for cash. Another factor is the inventory is low. I just had a meeting with some real estate agents and they were talking about the fact they don’t have a lot of listings.”
Some data would suggest Tropical’s mortgage business is rolling along. The credit union closed $22 million in home loans in 2010, $57 million in 2011 and $110 million last year. So far this year, it’s ahead of last year’s pace.
“The big difference is 35 to 40% of our business now is purchases, versus last year when it was 15 to 18%,” Leever said.
Leever credits the marketing department with raising member awareness that Tropical Financial offers mortgages.
“When you’re competing against cash buyers, I think the best thing to do is start early. We’re just getting marketing underway that advises ‘Start your home search with Tropical.’ We partnered with CU Realty in October last year and that’s helped considerably. The member gets a 20% rebate on the realtor commission and also has access to the Internet listings.”
Tropical is urging members to prequalify, too, he said.
“Normal purchases take anywhere from six months to 18 months to get finalized,” Leever said. “Especially with all the cash offers out there, you have to make a solid offer, you have to rely on an agent who will get the job done for you, and you need a lender who can get the loan closed quickly.”
Reports indicate many cash buyers are investors looking to rent out the homes until prices rise, then sell them at what they hope will be a handsome profit. Leever indicated prices are up 25 to 30% in Tropical Financial’s main market area of Miami-Dade, Broward and Palm Beach Counties. However, they are still 30 to 40% below peak.
Leever said potential buyers remain eager to purchase. A real estate agent told him he listed a condominium for sale on Saturday and on Monday he had eight offers.
Barbara Moreno, mortgage loan manager at $863 million South Florida Educators Federal Credit Union in Miami, agrees the all-cash wave is drowning the dreams of many buyers.
“It’s creating quite a problem for home buyers in certain price ranges,” Moreno said. “It’s not just first-time home buyers. Basically it encompasses everybody who is trying to purchase a house with financing. People are out-bidding them, or offering the same with a cash offer.
“It’s actually been happening for quite some time, the last year and a half. People are in a very difficult situation even trying to buy some of the short sales and foreclosures. They’re also getting eaten up by cash buyers.”
She said real estate agents have told her stories of putting a house on the market and selling it the same day. There are very few houses in the sought-after $200,000 range.
“It’s insanity. It’s crazy,” she observed.
Moreno has heard more properties are going to be coming onto the market, including foreclosures that have been stalled. She said she does pre-approvals all day long for people with good credit who have saved a down payment but can’t find a house. Once properties become available, many of those people are going to have an opportunity to actually buy, she said.
As executive vice president of lending at Fairwinds Credit Union in Orlando, Jim Adamczyk said he sees disappointed potential buyers every day.
“The members we deal with are very frustrated,” he said. “Anything that’s affordable, $200,000 or less, has multiple offers as soon as it’s on the market. The experience is not that great for the first-time buyer. There was one property that had 20 offers the first day. I think some of the first-time buyers are saying, ‘Let’s just rest.’
In addition, he said buyers new to the market and some returning buyers have additional documentation and compliance requirements.
“ For the consumer, it’s aggravation on both sides,” he said.
Next Page: Two Groups of Buyers
Adamczyk said there are two groups of cash buyers: big institutional investors who have moved into the market with billions of dollars and small investors seeking to make money renting out a home.
“As long as the return is good, and money is cheap for the investor, they’re going to keep buying,” he predicted. “Rates are definitely going to impact on how much they buy.”
For the past couple years Adamczyk has seen about half of home sales in the Orlando area close for cash.
“For credit unions, like most lenders out there, the last two years have been a refinance market. I think lenders were so busy with refinancing that kind of offset the purchase market. Most recently, when rates skewed up, all the refinancing dried up and everybody’s looking for purchasers.”
The Mortgage Bankers Association has been watching the trends. Mike Fratantoni, vice president of research and economics, said cash has become king in areas of the country struggling with a lot of foreclosures and other distressed properties. Cash sales are appealing because they can be completed more quickly.
However, in some cases that’s not the whole story, he said.
“You have an investor group or an institutional buyer who is paying cash for the property but there might be some financing in the way the deal is organized,” he said. “Even though the transaction may look like a cash deal, I’m not sure that means there’s no debt involved.”
Nationwide, the MBA figures 25% of home sales are cash sales at this point. Mortgage lending is still not close to what would be expected in a robust economy. The MBA expects about $620 billion in mortgage originations in 2013. A more typical figure would be $1.2 trillion. Next year’s pace is projected at $700 billion.
“Particularly in time like now, when we’ve seen a 70% decline in refinance, lenders are more interested in ever in doing purchase loans,” Fratantoni said.
On the bright said, Fratantoni said he anticipates the all-cash pace will slow when there is no longer the prospect of a high level of investment return and the market resumes what could be considered a more normal profile.
“We’re almost there in many markets in the country,” he said. “What we’re seeing nationally is that as house prices have increased more sellers are willing to list their properties. That’s a healthy sign, and I think first-time buyers will begin to see more inventory.”
His outlook was supported by an Oct. 6 Tampa Bay Times article that reported big investors are putting on the brakes due to rising prices, skeptical financial backers and fierce competition.