Despite recession, demographic often confuses buying power with real wealth

Unlike the Greatest Generation (those who grew up during the Great Depression), baby boomers have never been labeled as risk-averse. They take chances, look for adventure, and are generally positive about the aspects of aging.

They overborrowed for homes, cars, tuitions and vacations, leading Eric Snider, who holds a doctorate in social psychology and once served as Shea Homes’ marketing director for Trilogy, the company’s upscale active adult communities, to say “baby boomers never met a loan they didn’t like.”

Didn’t the mortgage meltdown and subsequent fragile economy change all that? Aren’t all age groups (or “cohorts,” as the marketing folks prefer to call them) playing it closer to the vest?

Two new studies revealed a bit of the tightfistedness while leaving the door open to the adventuresome. The most recent Associated Press-LifeGoesStrong.com poll found the 77 million-strong generation born between 1946-64 is increasingly worried about retirement and their finances given the economic crisis of the past three years.

In fact, just 9 percent say they are strongly convinced they’ll be able to live comfortably in retirement.

However, a new survey from Coldwell Banker Real Estate showed that boomers held a strong desire for investment properties and second homes despite not being able to sell their primary residence.

“The baby boomer generation has driven the U.S. economy for years, and like many Americans, they may be anxious about their next real estate decision,” said Jim Gillespie, chief executive of Coldwell Banker Real Estate.

“I know baby boomers are a very diverse group and cannot be described in generalities, but our survey clearly indicates that those boomers who are financially secure are actively seeking to buy their retirement home, or a second home, and they are taking advantage of the opportunities and value available in today’s market.”

The important term is “financially secure.” Boomers have been known to confuse borrowing power with real wealth. It has gotten them into trouble in the past via option ARM (adjustable-rate) loans boomers took out to buy a larger home (or second home, car, or gold trinket) than they could afford.

Thankfully, those loans are no longer available because very few borrowers ever converted the “option” into a fully amortizing loan that paid off the house in a specific time frame. Boomers were, by far, the biggest audience for option ARMs.

“Baby boomers have been hit hard by the housing downturn,” said Stan Humphries, chief economist for Seattle-based Zillow. “Many in this generation had once thought of their home as a key element of their retirement strategy. However, as the value of their primary residence declined, so did their retirement resources.

“On the brighter side, those boomers who have the means to purchase a second home today are in a much better position than home shoppers in 2006. Today, shoppers have access to record-low mortgage rates and can purchase a home for prices not seen since the early 2000s.”

According to the AP poll, about 6 in 10 baby boomers say their workplace retirement plans, personal investments or real estate lost value during the economic downturn.

Of this group, 53 percent say they’ll have to delay retirement because their nest eggs have dwindled. A total of 73 percent of those polled said they would keep working, up from 67 percent in the AP poll in March, a greater percentage than any other generation.

The losses include home prices that have dropped by a third nationwide over the past four years and have left boomers anxious about moving and selling their homes.

John Tuccillo, former chief economist for the National Association of Realtors and one of the nation’s astute housing analysts, said some boomers still have the itch to experience “what could be” but are stymied by the slow-moving housing ladder. They simply can’t sell to take the next “rung of the ladder.”

“Baby boomers face a divided market,” Tuccillo said. “Their primary residences are in places where demographics and market changes make them hard to sell. Yet, because of the deep discounts now available in Sun Belt states like Nevada, Arizona and Florida, second homes — either as investments or potential retirement locations — are compelling buys.”

What has not changed is that boomers remain unpredictable.

“Baby boomers are famous for believing one thing and then behaving totally different from what they think they do,” said Snider. “What they do want is personal experiences. Boomers are all about personal experiences.”

And those “wants” got many boomers in trouble in the past.

Interest rates fell to new lows in September. Low interest rates increase affordability and should make it easier for buyers to qualify. Yet stories of buyers waiting months to gain loan approval and home purchase transactions not closing on time due to lender’s strict underwriting are all too common.

Some buyers are turned down for illogical reasons. For instance, if you have investments — even if they’re performing well — an underwriter might deny the mortgage because your portfolio doesn’t fall into the underwriter’s risk assessment model.

One couple was turned down because the husband had worked at his current job for less than a year — even though he was making more money at the new job than he was before.

These buyers were well-qualified. The wife had worked several years for one employer and was able to qualify for the loan on her own. So, the transaction closed, although two months late.

Generally, it’s more difficult to qualify now than it was a year ago. Most conventional lenders require a 20-25 percent down payment. For the lowest interest rates, your credit scores need to be in the 700 range. You need to have verifiable income and cash reserves in addition to your down payment and closing costs.

You could run into underwriting problems if you’re self-employed, as W-2 income is much easier to verify. Other hurdles are lapses in employment and owning a lot of property. Some lenders won’t lend to buyers who have more than three or four residential properties.

If you’re buying a new home before selling your current home, you’ll need to have 30 percent equity in your current home. This needs to be verified by the lender’s appraiser. Also, the lender will want to see a copy of the cashed check from the tenant for the first month’s rent to verify rental income if needed to qualify.

HOUSE HUNTING TIP: As soon as you’re serious about buying a home, find the best mortgage broker or loan agent you can to assist you. Don’t make your selection based on interest rates alone. A good track record counts for a lot.

Closing the deal should be your primary goal. If you have to pay 0.25 percent more to assure your transaction closes on time and that you’re not turned down at the last minute, it’s worth it.

Be candid with your loan professional about anything in your financial picture that might impact loan qualification. A good loan agent or broker will be able to assess your financial situation and anticipate what you’ll need to do to satisfy the underwriter.

Be aware that appraisal issues can impact your loan approval. For example, if a previous owner added square footage without a building permit, the additional square footage probably won’t be included as livable square feet.

If the appraisal comes in for less than the purchase price, the lender might not lend you enough to close the deal. Include an appraisal contingency in your contract.

As of Oct. 1, the conforming jumbo mortgage limit for expensive housing markets like New York City and San Francisco dropped from $729,750 to $625,500. In some cases, conforming jumbo lenders have moved into the market to pick up some slack. You can expect to pay about 0.25 percent more for a 30-year fixed-rate conventional jumbo loan, in some cases. However, today’s lower interest rates will help boost affordability.

There are more jumbo financing options available now. Adjustable-rate mortgages that are fixed for 10 years and then revert to an adjustable have a starting rate about 0.25 percent less than a 30-year fixed jumbo. A five-year fixed starts about 0.5 percent to 0.75 percent lower, but is riskier.

THE CLOSING: Because of the risk factor, the lender may want you to have a large cash reserve. Your retirement account counts toward this.

“My application to refinance my $200,000 loan was recently turned down … do I have any recourse?”

If by recourse you mean a third party of some standing who will direct the lender to make the loan, or attempt to persuade them to do it, the answer is “no.”

No third party is going to reunderwrite the loan to see if the lender made a mistake. Such mistakes are very rare because lenders make money only on loans they close; they lose money on loans they reject.

Reapplying with another lender

It is possible but unlikely that another lender would approve your loan. Virtually all $200,000 loans are either sold to Fannie Mae or Freddie Mac, and therefore subject to the underwriting rules of those agencies; or insured by FHA and subject to its underwriting rules.

Some lenders place “overlays” on top of these rules, which are more restrictive than those of the agencies. It is possible that your loan met agency requirements but was tripped up by a more restrictive overlay, which would mean that another lender might approve it.

Before applying elsewhere, however, I would discuss your rejection with the loan officer who gave you the bad news to see where your application fell short, and whether it might have met agency requirements.

On the assumption that you did not meet agency requirements, your only option is to change the transaction in a way that will bring it into compliance. The changes required depend on the reason or reasons you were rejected.

Credit score too low

In general, it takes considerable time to raise a credit score significantly, but there are some exceptions. One is where the score is depressed by a reporting mistake, which is not uncommon. As soon as the mistake is corrected, your score will jump. (See “How Do You Correct Mistakes In Your Credit Report?”)

Another possible way to juice your credit score is to pay down high balances on your credit cards. A high ratio of balance to maximum balance, called the “utilization ratio,” is considered a sign of weakness and potential trouble, reducing your score. Paying down balances to less than 50 percent of the maximums should raise your score.

Finally, you can detach yourself from the “wrong vendors.” Because finance companies lend to relatively poor risks, the credit score of any borrower owing money to a finance company is lower than it would be if the creditor were a bank.

By the same logic, borrowers who have credit cards of department stores are penalized, relative to what their score would be if they had cards issued by banks. If you can’t pay them off, place department-store cards at the top of your balance-reduction list.

Equity too low

The borrower’s equity in his property is its appraised value less the loan balance. Equity can be increased by obtaining a higher appraisal or by paying down the balance.

You don’t get a higher appraisal because you need one to refinance your mortgage; you get one because the appraiser made one or more mistakes that reduced value erroneously. You may well know the local market better than the appraiser, especially if he is located a good distance away; you will find his address on the appraisal report.

To make use of your information, however, you must start the process again with another lender. Under current rules, if your existing lender orders a new appraisal, he is obliged to use the lower of the two values.

You can also increase your equity in the house by paying down your loan balance, a process called “cash-in refinance.” If you have money in the bank earning 1 to 2 percent, a cash-in refinance that allowed a rate-reduction refinance that would not otherwise be possible would earn a very high return. Of course, you must have the cash to invest.

Debt-to-income ratio too high

In general, underwriting guidelines set maximum ratios of total debt payments to borrower income of 41-43 percent. Debt payments include the mortgage payment, property taxes, homeowners insurance, mortgage insurance (if any), and all other debt payments that extend beyond the next six months and are not deferred for a year or longer.

This includes home equity credit lines (HELOCs) and other revolving credits, credit card debt that you don’t pay off at month-end, auto loans, student loans and alimony and child support payments.

If your ratio is too high to qualify, there may be ways to reduce your debt payments. The cash-in refinance referred to above not only increases your equity in the house but it also reduces your monthly mortgage payment. Borrowers who don’t have excess cash but do have a 401(k) retirement account can borrow against it and use the proceeds to pay down other debt. Loans from a 401(k) are not included in the debt ratio.

The bottom line is that a loan rejection is not necessarily final, but it is up to the borrower to do what is necessary to convert the transaction from one that does not meet underwriting requirements into one that does.

Sellers should think twice before accepting additional bids.

Buyers who lose out in a multiple-offer competition or who make an offer a little too late may be offered the opportunity to be in a backup position. A backup offer is one that’s accepted subject to the collapse of an already accepted offer.

The seller can accept multiple backup offers, in which case they are ranked: backup offer No. 1, backup offer No. 2, and so forth. It’s rare in the current market for there to be more than one backup offer.

If you’re offered backup position, should you accept it? Buyers are often reluctant to accept a backup offer because they feel it will strengthen the resolve of the buyers in primary position to move forward with the deal if they hit a rough patch, such as a previously unknown inspection issue. And, in fact, this can happen.

Recently, buyers went into contract to buy a home in Oakland, Calif. The sellers provided many reports and disclosures on the condition of the property. However, someone inspecting for the buyers had a different opinion about the condition of the roof, gutters and downspouts, and said it would cost an extra $13,000 to fix.

Two days after the first contract was accepted, another buyer made an offer that was accepted in backup position. The backup offer was for a higher price than the primary offer. Rather than lose the house to the backup buyers, the first buyers removed their inspection contingency despite the new information they received about the condition of the roof.

Some buyers fear that if they accept backup position they will halt their search effort until they know for sure that they can’t have the home they want. This is a factor you can control. If you accept backup position, don’t slow down your quest to find a home to buy.

HOUSE HUNTING TIP: Make sure there is a provision in the backup position clause in the contract that says the buyers can withdraw at any time up until they are notified that the primary offer has collapsed and their offer has been elevated to the primary position.

It’s usually worthwhile to accept a backup position because there is a high fallout rate in the current market. Just don’t sit around waiting for the first deal to fall apart.

From the sellers’ perspective, it’s usually a good idea to counter an offer for backup position if there is more than one offer. Keep in mind that most buyers would rather be in primary position. Some won’t accept backup for the reasons mentioned above, or they may have another house in mind if they don’t get yours.

To entice a buyer to accept backup position, you may have to accept an offer with a lower price than the primary offer. Don’t expect a buyer to accept a counteroffer from you for backup position that also includes a price increase. Make sure you tidy up the offer as if it were a primary offer. There won’t be a chance to change the terms if the primary deal falls apart.

Don’t accept any offer just to have a backup offer. If you have a backup offer and the first contract fails, your home goes to the backup buyer without going back on the market. This can be a benefit to both buyers and sellers. The backup buyer doesn’t have to face multiple offers again, and the sellers don’t have to go through the hassle of finding another buyer.

Sellers who don’t like a potential backup offer because of a very low price might be better off not countering the offer for backup position.

THE CLOSING: Sellers should feel comfortable with a prospective backup offer; they may have to live with it.

Half of refinance applications are abandoned or rejected, as are 30 percent of purchase mortgage applications, according to the Mortgage Bankers Association. All told, the Federal Financial Institutions Examination Council (FFIEC) says that well over 2 million mortgage applications were rejected last year.

Want to avoid falling into that number? It’s tough — especially in light of the fact that mortgage lenders have become increasingly restrictive in terms of their lending guidelines since the housing market crash.

Here, as a cautionary tale and primer on what to expect, are the top six reasons mortgage lenders reject applications.

1. Income issues. Most failed applications falling into this category have income too low for the mortgage amount they are seeking; often, a spouse’s credit issues can create this problem, too, as the income the spouse plans to actually chip in toward the mortgage cannot be considered by a lender.

But increasingly, the recent vagaries of the job market are also causing this issue, as people who have changed their line of work or have changed from salaried employee to freelancer over the last couple of years can also have their home loan applications rejected based on income.

2. Muddled money matters. If the mortgage for which you’re applying plus your monthly payments on credit card, car and student loan debts will comprise more than 45 percent of your total income, you could have problems qualifying for a home loan. You might also run into problems if you rely too heavily on bonuses, overtime, cash wages or rental income — all of these can be difficult or impossible to get a mortgage bank to consider, and if they do, they might not take all of it into account.

3. Credit issues. Today, the mortgage-qualifying FICO score cutoff falls somewhere between 620 and 660, depending on which lender and which loan type you seek. More than one-third of Americans, by some numbers, have credit scores too low to qualify for a home loan. Even if your credit score is high enough to qualify, if you have any late mortgage payments, a short sale, a foreclosure or a bankruptcy in the last two years, loan qualifying could be difficult to impossible.

4. Property didn’t appraise. Since the whole industry had its hand (among other things) smacked for allowing home values to skyrocket in a very short time, appraisal guidelines have tightened up — some would say, even more than overall mortgage guidelines. So, it is increasingly common to have the property appraise for a price lower than the sale price negotiated between the buyer and seller.

This is especially common in the refinance realm, as well over a quarter of U.S. homes are now upside-down, meaning the mortgage balance owed is greater than the value of the home. (If you’re trying to refinance an upside-down mortgage, consider the FHA Short Refi program — contact your lender or get referrals to any mortgage broker who makes FHA details to apply.)

5. Condition problems. With all the distressed properties on the market, and with most nondistressed sellers barely breaking even, more home-sale transactions than ever are falling apart due to condition problems with the property. Many lenders will not extend financing on homes where the appraiser points out problems like cracked or broken windows, missing kitchen appliances, electrical problems, or wood rot.

And in the world of condos and other units that belong to a homeowners association, if more than 25 percent of units are rented (rather than owner-occupied) or more than 15 percent are delinquent on their HOA dues, new applications for refinance or purchase mortgages on units in the development are likely to be rejected.

6. Technical difficulties with application. The days when lenders just took your word for it are long, long gone. Applications with incomplete or unverifiable information are doomed.

If any of these mortgage loan application glitches arise in your homebuying or refinancing process, it’s critical that you connect with your mortgage professional, be it your banker or mortgage broker, to determine what course of action to take.

In some cases, it might be as simple as buying a stove you find at Craigslist and installing it before escrow closes; but with income issues your mortgage pro will need to help you determine whether it makes sense to pay some bills down, get a co-signer, or even wait six months so your income documentation will qualify.

Ginny, my parents, who are nearing 70 years old, currently live in a large home they had custom-built when my brother, sister and I went away to college.

They are both retired, and the house is nearly paid off, even though it’s worth much less now than they had expected it to be at this point in time.

But it’s a lot of work for them, they have way too much space, and it’s very costly to maintain and repair — even the basic monthly bills like electricity are extremely expensive.

They just mentioned that they are interested in possibly downsizing to a new home in a 55-plus community.

They can certainly afford the home, if they are able to sell theirs, but I am concerned about the additional costs for homeowners association dues and that this community offers no assisted living or long-term care … facilities for them to move to if and when that time comes. What things should we be factoring in as we help them make this decision? — Krishan K.

Krishan, age 55-plus communities ain’t what they used to be — some of these neighborhoods of vibrant, laughing, silver-haired yoginis, golfers and socialites offer lifestyle amenities so desirable they make some of us 30-somethings a tad bit jealous.

If your parents want to simplify their lives so they have time for the fun they deserve to have at this stage of the game, it’s no wonder one of these areas appeals to them.

Generally, when I’m talking or working with someone your parents’ age who is in good to great financial shape, I don’t push back too hard on lifestyle decisions they want to make.

If they’ve been relatively cautious, have prospered most of their lives, and are generally on sound financial footing, they’re not likely to start making stupid decisions now, nor is now the time to hold back and plan on waiting five or 10 years to do what they want to do.

But you’re correct that there are some important considerations you can help them process.

Here are a few:

1. Selling at the bottom of the market locks in their losses on their current home. Fortunately, they’ll be buying at the bottom of the market, too (see No. 2, below), so it might be less of a financial hit than it seems, at first glance.

But if the projected value of the home was the basis for the rest of their financial and estate plans, selling it now to fund the purchase of the new home might be problematic.

Talk with several, local real estate brokers who have successfully and recently sold homes in your parents’ neighborhood to get an estimate of what the home will sell for, and talk with your parents’ estate planners to revise the math in their plan based on the current market value of their home, the rough purchase price of the new home, and the estimated net change in their monthly expenses — saved maintenance costs and operating costs, offset by the homeowners association dues you’re concerned about — if they move, to understand how the other line items in their retirement plan will change.

2. It might be difficult to resell the home because of limited buyer pool. Homes in senior communities can be somewhat more difficult and take more time to sell than “regular” homes because the buyer pool is smaller and the numbers of retirement-aged people with the money to buy newer homes is limited.

Frankly, though, depending on where they live, it might also be difficult to sell their existing home.Work with a local agent sooner than later to get a sense for the average number of days a home stays on the market in your parent’s neighborhood, as well as to sequence their buy and their sale sensibly.

As such, it’s critical that your parents buy low — taking maximum advantage of the current market dynamics and the cash crunch in which many new home developers find themselves in.

3. Use the financial transaction and the physical home move as an opportunity to have a larger conversation and get organized. Talk with an estate planning attorney about how your parents should take legal title to the home, and how it should be addressed in their legal estate planning documents. Get some clarity on their health care coverage and plans.

Do they plan to age in place (i.e., hire home health care workers), move in with you, or move to a more health care-intensive community or institution? You might be worried about issues they already have resolved; vice versa, they might not even be thinking about these items yet.

Author’s note: Wall Street Journal writer Jeff Opdyke, in his new book, “Protecting Your Parents’ Money: The Essential Guide to Helping Mom and Dad Navigate the Finances of Retirement” (Harper Paperbacks, 2011), offers a thorough coverage of the issues you and your parents can and should discuss and address in the course of this conversation, including all of the above, as well as details like the key documents you and your parents should collect in one place (your parents’ move would be a great time to handle that), how to vet a home health care worker and how to make decisions about the various health coverage options available to them.

The Home Valuation Code of Conduct (HVCC) has stimulated growth of appraisal management companies (AMCs), which intermediate between appraisers and lenders for the purpose of preventing lenders from influencing appraisal outcomes. The result has been lower fees paid to appraisers, increased workloads, and deterioration in the quality of appraisals.

Deterioration has been aggravated by the spread of AMCs owned wholly or partly by larger lenders, who share the profits extracted from the hides of both appraisers and borrowers.

Lenders ordering appraisals from a company in which they have a financial interest in effect receive a piece of the appraisal fee paid by borrowers they subsequently reject.

This absurdity would be eliminated by requiring lenders to pay appraisal fees, which could then be passed on to borrowers in origination charges — except when the loan is rejected. In that event, the loss becomes the lender’s rather than the borrower’s, which is as it should be.

Requiring lenders to pay appraisal fees would induce them to catch ineligible borrowers earlier in the process. This would sharply reduce the number of borrowers who incur needless expense and delay when they are rejected later in the process based on inadequate appraisals.

This is not a radical proposal, on the contrary, charging a price that covers all of the seller’s costs, plus a profit, is the standard way of doing business. When you buy an automobile, you aren’t required to buy the tires separately from a tire vendor selected by your car dealer.

The home mortgage market is unique in requiring borrowers to pay for services required by lenders, with the lenders designating the acceptable service providers. This arrangement has always been a source of abuse, and regulations designed to control the abuse rather than eliminate it have never been successful. The abuse can be eliminated by requiring lenders to pay for the services they require.

Appraisal management companies should be ineligible for affiliated business arrangement status

Unfortunately, requiring lenders to pay for appraisals will not eliminate the market distortions associated with lender referrals to appraisal management companies (AMCs) in which they have a financial interest.

The financial incentive to direct appraisals to AMCs from which they receive a partial payback will remain, notwithstanding the adverse impact on appraisal quality. The way to eliminate it is to make AMCs ineligible for designation as affiliated business arrangements.

Where lenders have no financial stake in AMCs, they will select AMCs that have appraisers in the locality of the subject property, and that pay their appraisers well. Lenders become a force for good appraisals. Lenders with an ownership interest in AMCs are a force for bad appraisals.

What borrowers can do in the meantime

When the HVCC was instituted in 2009, it included a provision for an Independent Valuation Protection Institute (IVPI), funded by Fannie Mae and Freddie Mac, which among other functions would provide “a hotline number and email address … for consumers to contact if they believe the appraisal process has been tainted or if they have been affected by appraisal fraud.” But IVPI has never been implemented.

While borrowers are on their own, they are not helpless. They have information about the value of their property, or access to people with such information, that the appraiser may not have.

I recently corresponded with a consumer who had suffered a late-stage rejection based on an appraisal that placed heavy weight on the recent sale of an almost-identical house across the street at a very low price.

That transaction, however, was within a family and involved a “gift of equity” where the buyer sold for a price well below true value with the difference comprising a gift. The consumer knew this, but the appraiser did not.

On my suggestion, she provided evidence of the gift of equity to the lender who had rejected her application. The lender ordered a new appraisal, on the basis of which the loan went through.

Another possible basis for an appeal is where the appraiser is not located within the area and may not know the local market. The appraisal report, which you have a right to receive, will show the company and the appraiser’s address.

Don’t waste time trying to educate the appraiser; he is already thinking about his next assignment. Your recourse is to the lender. Lenders don’t like to reject loans because it means forgoing a profit they otherwise would make, so they are receptive to facts that undermine the credibility of the appraisal that forced them to reject the loan. But tears won’t do it, just facts.

Foreclosures are old news. Down real estate values? Been there, done that, right? Well, we might all have gotten tired of hearing bad news about the real estate market, but the facts show that in many areas, foreclosure rates will rise before they decline, and a number of other indicators point to things getting worse before they get better.

Reality check: A down market is not all bad news. Weak home values translate into opportunity for buyers — especially when the government keeps rates as low as they presently are to encourage homebuying. Many of the mortgages being foreclosed were toxic and could stand to be purged.

Today’s low prices and record-low interest rates also portend well for the future stability of the housing market in that new homeowners are much less likely to face the problems this last generation of homeowners did (i.e., spiking mortgage payments and plummeting home values).

In any event, the real estate market is likely to stay down or continue to decline, in terms of home values and sales activity, and increased foreclosures, before it improves, for the following reasons:

1. The massive foreclosure backlog. The New York Times recently reported that it would take lenders 62 years — years! — to repossess the 213,000 New York state homes currently in some stage of foreclosures. New Jersey homes? Forty-nine years. Illinois and Massachusetts? A decade.

While the foreclosure pipeline moves more quickly in states where homes can be foreclosed without a court’s involvement, like California (three years), Nevada and Colorado (two years each), the fact remains that there is a massive backlog of homes in mortgage default that will take years to work through.

And the trend is for these foreclosures to take more, not less, time than before — after the robo-signing scandal and related self-imposed freezes, courts and law enforcement have imposed more verification requirements, settlement conferences and more detailed audits of foreclosure files before they will allow repossession to take place.

Despite the fact that the rate of new foreclosure filings has slowed (some say this has more to do with banks being slower to file than any real change in the default rate of homeowners), the rate of foreclosures will increase and/or stay elevated for years to come.

2. Too-tight lending guidelines. How tight is too tight? Lending guidelines are too tight when they screen out creditworthy borrowers, which many industry insiders say today’s loan standards do.

Sixteen percent of Realtors reported a contract failure in July, which usually indicates that a borrower who was probably preapproved (i.e., had a good job and credit history) had her loan declined because she failed to pass tough underwriting standards, the property didn’t pass the lenders’ muster, or there was an appraisal problem.

Ron Phipps, president of the National Association of Realtors, described this number as “unacceptably high,” explaining that with “both mortgage credit and home appraisals, there’s been a parallel pendulum swing from very loose standards, which led to the housing boom, to unnecessarily restrictive practices as an overreaction to the housing correction.”

Loans originated in 2009 have a default rate right around 1 percent, compared with the 22-27 percent default rate on 2007 loans and the 3 percent default rate on 2003 vintage loans.

These numbers, taken along with the contract-failure numbers, suggest that today’s lending guidelines are a knee-jerk overcorrection that is prohibiting many worthy would-be buyers from becoming owners and limiting the much-needed absorption of the excess inventory of homes on the market.

3. Job market woes and transitions. The national unemployment rate of 9.1 percent is just barely better than the average 2010 rate of 9.6 percent — and job growth totally flat-lined from July to August of this year, the latest available figures.

And those numbers are, many feel, misleadingly optimistic, as many long-term unemployed have stopped being counted, and are underemployed in part-time jobs or working freelance gigs because they have no other option.

Clearly, none of these people will be buying homes anytime soon (most thriving freelancers will need to file two years of tax returns as self-employed before they can qualify to buy); and even some employed would-be buyers are hesitant to enter the market as long as jobs are scarce because they view their own positions as insecure. Job market health is a prerequisite to housing market health.

I stumbled upon a recent item in the business press: “With 40,000 foreclosures burdening its books in the first quarter alone, Bank of America will begin bulldozing and giving away abandoned homes it can’t sell. The bank will hand over 100 homes to a local agency in Cleveland, with similar plans scheduled for Chicago and Detroit. Other banks and Fannie Mae are also considering programs of their own.”

This is good news for social service agencies that supply low-cost housing for those in need. And, although there are hundreds of different categories of low-cost housing, I would like to focus on just one special program that supplies housing and additional services to people with HIV, or, technically speaking, the human immunodeficiency virus that causes acquired immunodeficiency syndrome (AIDS).

(People can be infected with HIV and not have AIDS; they do not have AIDS until they develop serious symptoms. Many remain infected but apparently healthy for years.)

Most folks aren’t aware of it, but for more than 20 years the U.S. Department of Housing and Urban Development has offered a housing program called Housing Opportunities for Persons with AIDS, which is mostly known by its acronym, HOPWA.

HOPWA funds may be used for a wide range of housing, social services, program planning and development costs. These include, but are not limited to, the acquisition, rehabilitation or new construction of housing units.

In 1992, HOPWA received its first funding of $47 million. For fiscal year 2011, the funding reached $334 million and it was allocated across 134 communities, with 26 competitive grant renewals.

The overriding concept with HOPWA is that people with HIV adhere to their medications much better when they have somewhere safe, decent and affordable to live.

Last year, about 91 percent of the people eligible for the program were extremely low-income and 7 percent just low-income, said Mercedes Marquez, HUD’s assistant secretary for community planning and development. “This is an incredibly targeted program.

And of those served in 2010 — over 2,300 people — about 13 percent were homeless and HIV-positive at the point of entry into the program. Of all the clients served in 2010, nearly 2,500 were veterans.”

As the medical response to the disease has changed and people are living longer, housing needs have changed as well.

“Before, the need was so great, the disease progressing so quickly, people’s health status was so precious, the most effective thing to do was group people together so as to get them the services they needed,” Marquez said.

“Now, people can live more independently and are more integrated into the community. Almost 49 percent of HOPWA money is actually used as a housing subsidy in the form of tenant-based rental assistance.”

AIDS Alabama, based in Birmingham, calls itself the only organization in the state that focuses on providing housing to needy individual and families with HIV/AIDS, because, said Kathie Hiers, CEO of the nonprofit, “national research shows 40-60 percent of all persons living with HIV/AIDS report a lifetime experience of homelessness or housing instability.”

AIDS Alabama owns a number of properties that it uses for permanent and transitional housing, and has other housing assistance programs.

“We just bought a six-plex apartment in a part of Birmingham that is not in real good shape right now, but folks are moving in and trying to build up the area,” Hiers said. “We just got a homeless grant to renovate it.”

Asked if the recession has been helpful or harmful to her program, Hiers said, “In these economic times it’s been challenging, but at the same time real estate has never been cheaper. We have been able to use a bit of HOPWA funding to leverage other funding sources to develop some housing.”

HUD’s response to the foreclosure crisis has been a series of programs aimed at stabilizing individual markets, including about $7 billion through the Neighborhood Stabilization Program. Executives of nonprofits usually leverage one HUD program with another HOPWA or with other various local funding sources to get housing constructed, or reconstructed.

AIDS Alabama has benefited from a volunteer effort from Auburn University’s architectural school, which built two “green” structures for the nonprofit, one using hay in the walls for insulation and another that used railroad cars. Recently, another local nonprofit rehabbed a number of homes that had been in foreclosure and gave three to AIDS Alabama.

Similarly, Clare Housing in Minneapolis has strung together a number of projects to house people with HIV/AIDS. Currently, the organization operates six adult foster care homes, a 32-unit supportive housing development, and 20 units of scattered-site housing.

HOPWA funds were used to develop two Clare Housing structures, including the 32-unit supportive housing building, said Lee Lewis, Chare Housing’s executive director.

“These buildings didn’t exist before the HOPWA grants,” Lewis said. “You usually have to pull together a half dozen to a dozen different funding sources. Both these projects have HOPWA dollars and low-income housing credits.”

The HOPWA funds, which can be substantial — the three-year HOPWA grant for Clare Housing’s supportive housing totaled $850,000 — often act as a catalyst for other funding.

“In each instance when we got the HOPWA award, it got the attention of all the other local fund sources, city, state and county,” Lewis said. “It’s unusual for federal money to come into a project, so after we got the HOPWA award, the other fund sources got together and figured out how to get the package together and over the goal line.”

When people move into Clare Housing homes, Lee said, “their viral loads go down; their CD4 counts go down; they become less likely to transmit the disease; and they have access to medical care.”

Nonprofits like Clare Housing and AIDS Alabama have been very aggressive in acquiring and building housing, as well as supplying rental assistance, but it’s never enough.

As Marquez said, “We have over 1 million people in the country with AIDS and we estimate there are 125,000 households that have unmet housing needs of people living with HIV. With 56,000 new HIV cases annually, the need continues to grow.”

The real estate market meltdown was much more severe and has lasted much longer than even the most bearish housing market observer would ever have predicted. Rather than values taking a dip, they’ve taken a double dip in many places; and the housing sector drama has infected the job market and the entire world’s economy.

Yet, there are some very shiny silver linings to this whole mess — a handful of ways in which our mindsets, habits, behaviors and approaches to money, mortgage and even life decision-making — have been changed by this real estate market debacle. As I see it, here are the five best things about this otherwise terrible housing recession:

People now buy for the long term. Even Jeff Lewis, that reality TV house flipper extraordinaire, has declared that he’s tapped out of the flipping business for the foreseeable future, trading in his real estate wheeling and dealing for the design business.

Recently, he mentioned having lost six homes in the real estate market crash. While Lewis flipped homes as his business, just five years ago, many Americans — homeowners and investors alike — took a short-term view on their homes, buying them with the idea that they could count on refinancing, pulling cash out or even reselling them anytime they wanted, at a profit.

Reality check — those days are gone. Now, buyers know they’d better be prepared to stay put for somewhere between seven and 10 years (shorter in strong local markets, longer in foreclosure hot spots) before they buy if they want to break even. And this is causing them to take mortgages they can afford over time, and make smarter, longer-term choices about the homes they buy.

TWO:  Dysfunctional properties are being weeded out and creatively reused. Municipalities like Detroit and Cleveland are demolishing blighted and decrepit properties in dead neighborhoods en masse, intentionally shrinking their cities to match their shrinking populations. These efforts are also eliminating breeding grounds for crime, and focusing resources on the neighborhoods that have a better chance of surviving and thriving in the long term.

In the so-called “slumburbias” of central California, Nevada and Arizona, McMansions are being repurposed into affordable housing for groups of seniors, artist communities and group homes.

THREE:  American housing stock is getting an energy-efficient upgrade. The news would have you believe that every American has lost his or her home, walked away from it, or is now renting by choice. In fact, the vast majority of homeowners have simply decided to stay put.

Instead of selling and moving on up, homeowners are improving the homes they now plan to stay in for a long(er) haul. And this generation of remodeling is focused less on granite and stainless steel, and more on lowering the costs of “operating” the home and taking advantage of tax credits for installing energy-efficient doors, windows, water heaters and more. And while the first-time homebuyer tax credit is a thing of the past, the homeowner tax credits for energy-optimizing upgrades are in effect until the end of this year.

FOUR:  People are making more responsible mortgage decisions, and building financial good habits in the process. Buyers are buying far below the maximum purchase prices for which they are approved. They are reading their loan disclosures and documents before they sign them. And, thanks to the stingy mortgage market, they are spending months, even years, in the planning and preparation phases before they buy: paying down their debt; saving up for a down payment (and a cash cushion, so that a job loss wouldn’t be disastrous); being responsible and sparing in their use of credit to optimize their FICO scores; and creating strong financial habits in one fell swoop.

FIVE:  Our feelings about debt and equity have been reformed. Americans no longer use their homes like ATM machines, to pull out cash, pay off their credit cards and then start the whole overspending cycle over again. Many can’t, because their homes are upside down and cannot be refinanced in any event — much less to pull cash out.

Others have been reality-checked by the recession, and are dealing with their non-mortgage debt the old fashioned way: by ceasing the pattern of spending more than they make, and applying the self-discipline it takes to pay their bills off.

Home equity, in general, is no longer viewed as an inexhaustible source of cash. Rather, we see it as a fluctuating asset to be protected and increased — not so much through the vagaries of the market, but through the hard work of paying the principal balance down. Many of those refinancing into today’s lower rates aren’t doing it to pull cash out, as was the norm at the top of the market; instead, they are refinancing into 15-year loans to pay their homes off sooner than planned, or reducing their required payment so their extra savings can be applied to principal.

Of course, it remains to be seen how lasting these changes will be if and when home prices go up and mortgage guidelines loosen up. But since neither of these things look likely to happen in the short term, hopefully there’s a chance that these behavior shifts will become part of a permanent mindset reset for American housing consumers.