Editor’s note: The following excerpts on the subprime lending mess and home financing are from this week’s Inman News Blog. A lot of provocative opinions and dire predictions surround the events taking place in the subprime mortgage market. Join the discussions at the Inman News Blog by clicking on the discussion links under these posts. (To read more about the subprime lending collapse, read the four-part Inman News special report, “Subprime Tsunami.”)
Opinion: Overreaction or cleaning out the system?
Financial scandals follow a predictable process. Here are my predictions for the subprime mess:
1. A period of unraveling as bad news accelerates. More sunshine will be cast on the industry from unqualified brokers, fraud to institutional enablement. Some big names will be drawn into the mess.
2. Excess by industry executives will come out: parties at the MBA confabs, sales meetings and other functions. CEO gains will also be exposed.
3. Congress will hold hearings.
4. Wall St. will retreat from mortgages in a big way, just as they retreated from dot-com companies in the early part of the decade.
5. A load of indictments will come down. Small mortgage bankers and brokers will feel the heat as big-name companies find fall guys, firing their mortgage execs. State attorneys general will have a field day; just watch Jerry Brown in California.
6. Some big banks will retreat from the mortgage industry all together.
7. Reform legislation will be introduced at the federal and state level.
8. A credit squeeze will harm the first-time home buyer market and hurt the overall housing market.
9. Fannie, Freddie and HUD will become important again.
10. NAR and the MBA will scream about the credit crunch.
Two trends are converging and it is not good news: an oversupply of condo construction just as lenders tighten the noose on ezzzzzzzzzzzzzzzzzzzzzzzzzzzzzzy home loans. The subprime fiasco is going to aggravate an already looming condo disaster.
This weekend, I was struck by the overwhelming noise about the subprime mess, which will certainly lead to news about more companies in trouble plus more evidence of fraud, Congressional inquiries, tighter underwriting criteria (no more 100 percent home loans) and a dark shadow over the real estate market. Train wreck cruising around the S.F. Bay Area this weekend, I was also amazed by the number of condo projects going up in urban infill locations, which are aimed at first-time home buyers and specifically buyers who do not have gold-plated credit and cannot qualify or afford the old-fashioned 20 percent-down home loan. This is a train wreck happening as we speak.
No more 100% loans
I was hosting my WSB radio talk show this morning (tune into http://www.thinkglink.com/radio to listen or go to iTunes to download it next week) and was taking calls from first-time buyers who wanted to know what kind of financing to get.
This isn’t unusual. During the course of a two- or three-hour radio show, I always get a few calls from folks who want to know more about mortgage financing.
But this particular caller wanted to know about 100 percent financing. And while I was answering his question, I realized that as of tomorrow, 100 percent options are going to be few, far between, and very expensive.
Countrywide Financial (www.countrywide.com) put out a notice at the end of last week that it was going to stop making 100 percent loans. It’s been at the forefront of these kinds of loans, but what isn’t as widely knows is that subprime lending accounts for a chunk of its portfolio — and those loans are going bad at a much higher rate than expected, just like in other lender’s portfolios.
(BTW: I’m not suggesting in any way that Countrywide will fall off a cliff like the two dozen other subprime lenders who are in real trouble. These loans are a relatively small part of its overall mortgage portfolio. But the company has decided to pull back from making these loans — at least for the moment.)
The point is, if you’re looking for a 100 percent loan, or an 80/20 piggyback mortgage, very few lenders are going to offer them. And if they are offering them, they’re going to require a higher credit score and better credit history.
Most people who want 100 percent financing (or anything more than 95 percent financing) are first-time buyers without a lot of options to begin with. VA loans, which were the first true 100 percent loans, are expensive to do and even the VA doesn’t like to do them.
For agents, this means you’ve got to figure out where the cash is coming from for the down payment before you waste your time showing houses to folks who are expecting to buy them with 100 percent financing. And for you “flippers” out there, the Nothing Down phenomenon is soon to turn into Almost Nothing Down.
Read the Inman News Blog for daily updates on subprime lending and other real estate topics.