Who will originate mortgages?
News analysis: Risk profile of real estate has changed
By Inman News, Tuesday, September 23, 2008.
The risk profile of what was once considered the safest investment in the land has taken a dramatic swing in the last 18 months.
During the peak of the U.S. housing market between 2002 and 2005, bullish forecasters and industry boosters promised that the most prudent investment in the world was U.S. home buyers. Investors from around the globe agreed, investing wildly in the residential mortgage market.
What investors did not realize is that while the housing market had performed magically for decades, lenders were underwriting crazy loans to borrowers who often did not understand what they were getting into and whose financial security depended on home-price appreciation.
A loan is only as good as the borrower and the underlying asset, which in this case is the value of the real estate. Both have wreaked havoc for investors in the last two years.
When the market began to collapse in 2006, investors discovered a dirty little secret that local real estate agents and mortgage brokers had known about for a couple of years. Loans were being made to unqualified borrowers on property that was rising too rapidly and could not hold its value.
Trillions of dollars in losses have quickly turned the tables on the perception of the safety and security of U.S. home loans.
So who will lend to future home buyers? The options are shrinking for four specific reasons:
- The secondary mortgage market for nonconforming and subprime loans has collapsed, so those who do underwrite these loans have fewer options for selling them. Discouraged by the risk, lenders are squeezing their loan volume.
- The wholesale lending market has disappeared: Big wholesale shops have gotten out of the business with the decline in the private secondary market (MBS), which was the golden goose for large loan aggregators.
- Without liquidity, mortgage brokers and originators have fewer sources of capital, so they are originating fewer loans.
- The number of traditional originators has declined dramatically. For example, Countrywide has been sold to Bank of America and WaMu is hanging on for its life. Other big lenders such as Wells Fargo are narrowing their lending band and taking fewer risks in this ugly market downturn.
These trends add up to a major credit squeeze for home buyers, shrinking the overall size of the pool of borrowers as the supply of listings grows dramatically. This supply-demand imbalance puts greater downward pressure on home prices, aggravating the cycle.
Where does the housing market find relief?
The Federal Housing Administration has seen a dramatic rise in demand for its loan guarantees, thanks to higher loan limits and relatively low down-payment requirements. HUD reports that in May, FHA was guaranteeing loans at the rate of 818,000 a year -- a nearly 15 percent share of the market. That compares with 289,000 mortgages guaranteed in 2007, or 4 percent of the market.
But FHA cannot fill the void.
The enactment of Treasury Secretary Henry Paulson's bailout plan could help. Once bankers are relieved of their "bad" home loans, they will have more leeway to boost lending. But the volume of these loans may ramp up very slowly as lenders cautiously return to the market -- making very conservative mortgages to borrowers who have perfect credit and large down payments.
You can imagine a geographically bifurcated housing market in which lenders will redline troubled areas where foreclosures are high and prices continue to tumble at double-digit rates. The hardest-hit areas will get worse.
Oddly, the bright spot in this mess is declining home values, making housing more affordable as mortgage rates remain low and government subsidies like the newly enacted $7,500 tax credit for new buyers attempts to prop up the market.
Ironically, subprime loans momentarily solved the affordable housing problem that festered after 10 years of price appreciation.
All of this portends a very slow recovery as the market continues to search for a bottom.
***
What's your opinion? Leave your comments below or send a letter to the editor.
All rights reserved. This content may not be used or reproduced in any manner whatsoever, in part or in whole, without written permission of Inman News. Use of this content without permission is a violation of federal copyright law.
You must login or register to post a comment.
Submitted by Jillayne Schlicke on September 23, 2008 - 2:15pm.
"Ironically, subprime loans momentarily solved the affordable housing problem that festered after 10 years of price appreciation."
Home values still have quite further to fall in many markets before we can say this is true.
However, I get the irony. :)
Submitted by Mike Sweeney on September 23, 2008 - 3:51pm.
The clock has turned back twenty years as far as what loans are now available. I highly doubt we'll ever see that level of subprime loans again. Many were just foreclosures waiting to happen.
LionSaves.com - refinance your debt
Submitted by chis eliopoulos on September 23, 2008 - 4:06pm.
"A loan is only as good as the borrower and the underlying asset, which in this case is the value of the real estate. Both have wreaked havoc for investors in the last two years." I took them this to understand that?Hellooooooo
I think the whole market will be better with out any of these entities in it.
All this "risk analysis" are rules that the banks have come out to play in the real estate game.And obviously are not that good at it.
Real estate by nature is a LONG TERM investment.One of the characteristics of this kind of investment is NO LIQUIDITY .The banks had encouraged speculation and "flipping" of properties. New sales and new loans were created but prices were increasing faster that the consumer can handle.I think this is the time to start again with owner financing,AITDs and land contracts.Who ever wants to speculate let him go to the stock market.Banks have power as much as consumers are willing to give them.If a buyer does not like the loan terms he should walk.It is always better to buy something in ones own terms.
Submitted by Diane Cipa on September 24, 2008 - 1:46am.
"The clock has turned back twenty years as far as what loans are now available. I highly doubt we'll ever see that level of subprime loans again."
Mike: I agree on the first point and am hopeful on the second.
The lending of 20 years ago was based on solid principles aka lend to borrower who can afford to repay, have demonstrated a willingness to repay, have some hard earned equity providing motivation to avoid foreclosure.
Inman News: Great article.
"When the market began to collapse in 2006, investors discovered a dirty little secret that local real estate agents and mortgage brokers had known about for a couple of years. Loans were being made to unqualified borrowers on property that was rising too rapidly and could not hold its value."
Well, what happens to an industry refusing to police itself? Regulation and more regulation.
Submitted by Commercial Mortgage Loans - Privately Funded - MasterPlan Capital LLC on September 24, 2008 - 7:29am.
No one will originate home loans unless and until they have a market to sell them into.
MasterPlan Capital LLC - Simple, 1 Page Commercial Mortgage Application; Online - www.masterplancapital.com
Submitted by Wenceslao Fernandez Jr, BS, Realtor, CDPE on September 24, 2008 - 8:55pm.
i personally believe that with this plan, we may finally begin to see the bottom materialize right before our eyes.
This does not mean painless days ahead. This means that buyers best get off the fence and sellers must get ready to price right and sell.
It took the RTC about 5 years to rid themselves of a very different product line. It may take us now at least that long to achive the same.
Lets not forget to cross T's and dot I's so that we can be sure nothing like this ever happens again, including proper oversight and fair compensation packages that reward the good and reprimend the bad.
www.MiamiRealEstateKing.com
Certified Distressed Property Expert
Miami-Dade County, Florida.
Submitted by Dale Stouffer on September 24, 2008 - 10:56pm.
Whoever wrote this piece incorrectly blamed mortgage brokers as the sole mortgage origination responsible party for all the bad loans written.
The author wrote:
"When the market began to collapse in 2006, investors discovered a dirty little secret that local real estate agents and mortgage brokers had known about for a couple of years."
While mortgage brokers have originated in excess of 60% of the residential loans in the US for the past 8-10 years they aren't the only folks out there originating loans or aware of the market doings.
You mentioned Countrywide, Bank of America, Wells Fargo - all of these companies are mortgage banks or banks who all have or have had subprime origination shops working for them. I have competed with these companies for years, so to say that it was just mortgage brokers is just plain irresponsible and incorrect.
The Secretary of AZ Department of Financial Institutions spoke once suggesting that mortgage banker loan officers were the recipient of consumer complaints by a ratio of 2 to 1 over mortgage broker loan officers in the state of Arizona.
I guess this isn't direct evidence that mortgage bankers were closing these types of high risk loans (which they were and probably still are on a limited basis like everyone else) but it does suggest bigger staff problems in the banking home front than the mortgage broker front.
Unfortunately, the mortgage broker community is taking the brunt of the criticism of this mortgage debacle while the bankers play victim idly standing by as everyone else gets the torch to their feet.
Bankers are every bit to blame for this mess, and they were in every corner of every mortgage loan that was underwritten, and every value scandal that has been busted and those that remain under investigation.
Why would bankers standby while their mortgage broker customers get the ax? Simple, there's a lot of money to be made in origination fees that mortgage brokers participate in by originating 60% of the mortgages in the US.
This may sound crazy, but is this whole process just an engineered calculated play by the banking industry to take back their industry kicking to the curb millions of homeowners,mortgage brokers and real estate agents?
Respectfully,
Dale Stouffer
http://GetPreQualified.com
Your First Step to Buying a Home
Submitted by G N on September 29, 2008 - 4:31am.
Sadly, this article fails to mention owner financing, which will now play a much bigger role, as evidenced by fresh start ups like SellFinanced.com - Forget the Bank! and Owner Financed Real Estate as well as growing number of forums like: Owner Finance Forum