THE EFFECTS OF THE BOOM AND BUST CYCLE ON REAL ESTATE FINANCING By     David A. Chodack According to the National Association of Realtors, a seasonally adjusted average of five million existing homes are sold in the United States. While it is fairly  common knowledge that the sale of new homes has a ripple effect on the economy, impacting everything from the sale of lumber to light fixtures, less attention is paid to the effects of the cyclical nature of existing home sales. Home sales generally go up in the Spring and Fall and drop off as the holidays approach and then again during the Summer months as people go away on vacation. This is a recurring pattern in most areas of the country and one that lenders, Realtors and others in the real estate business anticipate. Therefore, these changes  cause little or no real disruption to the industry. Less predictable and cyclical  and therefore more disruptive, are changes in buying patterns caused by changes in interest rates. When interest rates go up, existing home sales generally go down. If the rate hike is mild and/or temporary then the disruptive effect is minor. However when the interest rate rises steeply and/or remains high for any extended period of time, the effects are felt throughout the lending and real estate industries as lenders lay off loan processors and underwriters. Then,  when the interest rates come down again and people start buying homes again, the lenders do not have enough employees  to handle the rush. The result of this pattern is inefficiency, plain and simple. When interest rates go down, lenders must scramble to hire people to meet the rush. Since most of the experienced people they laid off have found new jobs, they must hire, new, inexperienced people to fill many of the positions. Inexperienced people need to be trained. They can not just jump in and work at peak efficiency from the beginning. It just does not work that way. These new employees take time to learn on the job and a confused mind usually says "No." Therefore, borderline loans, which would probably be accepted by more experienced underwriters, often fall through the cracks. Clean, simple, obvious "A" paper loans still get approved, but even these often take longer than necessary, as the paper work proceeds slowly. Sometimes, documents are misplaced or misunderstood. Things have to be submitted more than once. Letters of explanation sometimes have to be written and phone calls made. It can be a vary tiring, time consuming process. Buyers and Sellers get frustrated. People refinancing their loans to take advantage of low rates, start to think twice. Lenders can afford to shrug and say "Oh well." After all, they have the money and as long as people really want it, then they will put up with whatever they have to. But for mortgage brokers it is not that easy. There are lots of brokers out there and they are just middlemen, who are supposed to make the process easier for borrowers. They are ultimately expendable, especially if borrowers don't feel well served. This is why mortgage brokers, unlike lenders, tend to come and go. When rates get high and business gets slow, many brokers fold and go out of business. When rates come down and business starts booming again, then new brokers spring up to take their place. Some brokers however, seem to be immune to this cycle. They stay in business year after year, through good times and bad. Their income may vary, but they don't just fold up and disappear when ever rates get too high and somehow they seem to be on top of things when rates go down and business gets hectic. Like experienced sailors, they seem to ride out the storms. There is really no mystery to this. These are just the companies who prepare. Since interest rate fluctuations are a normal part of the mortgage business and not an aberration, this is really the only sensible way to stay in business and even thrive, as truly smart brokers learn to use the natural instability of the business to their own advantage. In a business where the lenders are not always as well prepared for interest rate changes as they should be, smart brokers have to be doubly prepared. Two inexperienced people talking to each other - one on the lender's staff and the other one working for the broker - can be a real disaster. Therefore, smart brokers who plan to stay in business for the long haul, know that they must hire and train good people and then find a way to keep them. If your in-house document preparation person is experienced and efficient, then often he or she can guide the less experienced people on the lender's end and help ensure that transactions do flow relatively smoothly. BACK TO CREDIT AND MORTGAGE ARTICLES CONTRACT WIZARD HOME PAGE TAX SALE RICHES HOME PAGE MORTGAGE MAGIC HOME PAGE