Part 4: The Market from the Eyes of a Loan Officer

Part 4 of this series of interviews with respected professionals working in the Chicago real estate market is from the perspective of loan officer, Ken Dickerson of RWF Mortgage.

Ken Dickerson has been in the sales profession since 1984 in a variety of sales, sales training, and management positions mostly in the printing industry. In 2001 he turned to the mortgage profession as a loan officer, with RWF Mortgage, an affiliate of Wells Fargo, for over 3 years.

Q. Depending on who you talk to, the Chicago real estate market is in a state of flux or a total standstill. Where is most of your business coming from now? Refinance? Job Relocation companies? New purchase? Banks?

A: From mid November until late January a majority of my business has been refinance business. Beginning late January 90% of the business is new purchase business.

Q: What are today's biggest challenges? Have you seen any positive changes as a result of this market correction?

A: The biggest challenge is keeping up with all of the guideline changes and trying to communicate the changes to clients that had previously been pre-approved. The changes have been a reality check for prospective purchase and refinance customers. It's hard to go backwards after borrowing money was so easy for several years and some clients really struggle with it.

Q: We've been going through a huge new construction boom here. Thoughts on the Spire, Trump Tower and other big ticket projects? Do you think the hotel/condo format will be sustainable in Chicago? How long do you think it will take to all be absorbed?

A: With the tightening of lending guidelines the new construction developments will take a hit until they are complete. It will be very difficult to obtain financing on the industry identified higher risk structures such as uncompleted developments or hotel/condo combinations.

Q: With new regulations, what has changed with lending? How much are buyers required to put down? How do you see the new stimulus package taking effect with regard to new loans and existing loans? With this week's news, have you seen a bump in purchase loan applications?

A: I'm afraid to answer this string of questions because as soon as I do the guidelines could change. While credit rating has always been a key component of the financing picture it is now a major factor in interest rate and obtaining a loan. No longer can you secure no income, no asset loans as everything is full documentation. Even with the full documentation you could be required to show an audit trail of any large deposits in any of your asset accounts, and explain and credit check activity that shows on a credit report over the past 90 days. You still have low down payment options with FHA at 3 1/2% however; FHA can be restrictive when it comes to condominiums. Other than that for conventional conforming loans you currently need a minimum of 10% down payment. Just recently a majority of banks are requiring a 30% down payment and a minimum credit score of 720 to obtain a jumbo loan.

I have seen an increase in purchase applications but it's more to do with the time of year than anything else at this point.

Q: With new construction what hurdles are you encountering? How have investors been affected? How are commercial loans affected?

A: New construction guidelines are changing to 70% units either sold or under contract to obtain financing. Again, this reflects the high risk associated with new construction condos by the banking community. Investors will need a substantial down payment and the guidelines are also becoming more restrictive on the % of units in the development that can be investor owned.


Q: Real estate is local. Which neighborhoods are you busiest in? Are you writing more loans for single family homes doing better than condos?

A: In the Chicago market we will always be writing a large number of condo loans. In Chicago single family homes usually require a jumbo loan and until lately the only rate that was worth considering was the 5 year ARM. Just recently the 30 year fixed has dropped and with a 30% down payment and a 720+ FICO score you can get a very good rate. I have always been busiest with the Lincoln Park and Lakeview neighborhoods and that hasn't changed. I have seen more activity in the Lincoln Square, Ravenswood, and Roscoe Village neighborhoods as well.

For more information about Ken, questions about mortgages or to hire him as your lender, contact him directly at kenneth.b.dickerson@rwfmortgage.com or 773-572-6540.

Part 3: The Market from the Eyes of a Real Estate Appraiser

The series continues with a broader perspective than just my own, I have interviewed other respected professionals working in the Chicago real estate market. Part 3 of this series is reflecting the market from the eyes of an appraiser, Kevin Maloney.

Maloney Appraisal has been located in Lincoln Park since 1963 and Kevin Maloney has been president since 1987. The firm provides over 1,500 appraisals a year. These appraisals are typically on behalf of lending institutions such as the Northern Trust and JP Morgan Chase. The firm has particular expertise on the City’s north side neighborhoods.

Q: Depending on who you talk to, the Chicago real estate market is in a state of flux or a total standstill. Where is most of your business coming from now? Refinance? Job Relocation companies? New purchase? Banks?

A: The majority of our business has always come from Banks. The recent work has been dominated by residential refinance activity and unfortunately from appraisals associated with troubled commercial loans.

Q: What are the toughest challenges today? Have you seen any positive changes as a result of this market correction?

A: The biggest challenge on a broader, national scale is to end the slide in property valuations and stabilize of employment. Virtually all market sectors have seen price reductions of varying magnitude. What this unfortunately signals to a rational purchaser is that if they wait, they are likely to be able to secure a property for less than if they act now. This is what is at the heart of a buyer’s reluctance to “pull the trigger” and has helped to contribute to the massive drop in transaction volumes seen throughout the City of Chicago. Sellers must realize that unrealistic pricing has a devastating effect in a declining market as the market often continues to “move away” from the price during the prolonged exposure time. The risk of overexposure is always present even in a strong market as homes begin to be viewed as stale but in a declining market these risks are compounded. The positive change as a result of the market correction (decline) has been an increase in affordability.

Q: We've been going through a huge new construction boom here. Thoughts on the Spire, Trump Tower and other big ticket projects? Do you think the hotel/condo format will be sustainable in Chicago? How long do you think it will take to all be absorbed?

A: 2009 will be the last year we will see a number of major condominium projects delivered for quite some time. These projects were approved prior to the credit crunch. Obviously, they will simply add to the oversupply of units. We have seen a number of projects with direct views of Millennium Park continue to outperform the market in terms of absorption and resale. We have also seen some projects with a highly refined and modern architectural ascetic outperform the market. The biggest challenge/risk is for commodity units with no differentiating qualities. I am a bit reluctant to talk about specific projects but will say that any project that does not have committed construction financing is highly unlikely to be built in this environment. I will also say that in any project with a significant number of unsold units requires far more due diligence on the part of the broker. The developer should answer questions such as how many have contracted over the past 30 days, 90 days and 180 days. Have any discounts been offered? Are these sales at full list price? An unwillingness to offer answers, particularly regarding recent sales volume should be a big red flag, and I would avoid any project that has lost all sales momentum. Regarding the hotel/condo format, I do not appraise this type of unit. I have always been skeptical of this concept. Regarding the time it will take to absorb all the new construction, it will be over two years. A huge number of units are still investor owned and are leased at a net loss after taxes, assessment and debt service. This is a shadow market of units that still needs to be transferred to owner/users at some point.

Q: With new regulations, what has changed with appraising? How is square footage determined? Can you include basements? How many months back can you go to have a solid comparable property? How close to the subject property do you need to be? One mile? Do you have to revise appraisals after the underwriter reviews them?

A: The general guidelines regarding appraisals have not changed. What has changed is the level of scrutiny. The basic Fannie Mae guidelines have said for years that comparables within six months and one mile should be used and if they are not some explanation must be given. The guidelines anticipate that at certain times, appraisers must go beyond a mile and perhaps use at least some comparable sales that are older than six months. Many lenders are now adding additional requirements to the base Fannie Mae standards. The most common is the demand that two of the comparables have closed within the past 60 days and that one pending sale comparable and one listing comparable be used. I would recommend that you provide what you think are the two most similar comparable sales in the past 60 days, the most similar pending and the most similar active. If there are significant differences between the subject property and these comparables, point them out. However, since some underwriters are rigidly demanding this data you should at least have your say of providing what might be the “best of the worst”. We deal primarily with portfolio lenders and have had very little difficulty getting appraisals approved. The “credit issues” are another story and have northing to do directly with the appraisal. Regarding basements (any part below lot grade) the rule for appraising has been and remains that the square footage should be listed separately and not included in the gross living area. What brokers do is another matter as you are not bound by the same Fannie Mae guidelines.

Q: With new construction what hurdles are you encountering? Are you allowed to give credit for upgrades? The cost for some energy efficient options costs exponentially more than the counterparts. With single family homes, are you allowed to give credit for energy efficient upgrades and 'going green?'

A: The answer always is found in the market. If the market is showing value for upgrades or green items than we will give value. The unfortunate experience I have seen for single family homes is that the return is very low for energy efficient items. I hope this will change as the market becomes more aware of the technology and as the cost for green items comes down through economies of scale.


Q: Real estate is local. Which neighborhoods are faring better or worse? Are single family homes doing better than condos?

A: It is impossible to generalize with complete accuracy. Typically, the areas most significantly impacted have been locations with a very high percentage of subprime loans. Value drops as much as 50% or more have been seen in many of these areas. The value impact in these locations has been seen in all property types. For example in many areas of Rogers Park a three flat that once sold at $600,000 now can be bought for $350,000. Areas such as Lincoln Park and the Gold Coast typically have seen far lower value declines. However, what is dangerous with generalizations is that within a area like the Gold Coast, some high rise condominium buildings have seen a 20% decline in value off the peak while other have seen very little roll back in value. In general, single family homes have done better. However, this again is a generalization with many exceptions.

For more information about Kevin or to hire him for a real estate appraisal, contact him directly at maloney1@megapathdsl.net or 773-281-6013.