The single-family residential mortgage industry took a severe hit in 2007 and it isn't over yet.
Nationally the housing market slowed from a spectacular bubble level to something that is simply OK. Housing sales and starts for 2007 have been about what they were in 2001-2002 (that wasn't considered a crisis at the time). But, there is a glut of available housing on the market because buying slowed before construction slowed. In addition, the country is experiencing payment delinquency and foreclosure rates higher than have been experienced in the past six years because of the bubble effect - too many sales to too many unqualified buyers. The outcome is an increase in housing supply.
Why the delinquency and foreclosure problems in a relatively strong economy? First, it is an American belief that everyone deserves to own a home no matter their income or credit history. Second, some areas of the country have housing values and prices so high that traditional financing makes buying very difficult. Third, while the bubble was expanding investors flooded the market looking for short-term financing options to enable buying and flipping homes for short-term gain.
To accommodate all of these pressures and trends, the mortgage industry created new exotic loan programs that had not been offered aggressively in the past.
In the old days mortgages were offered by banks on what was termed a conforming basis or with government guarantees, such as FHA or VA. These loans required down payments or insurance (paid for by the borrower) that mitigated the risk of low or zero-down-payment loans. All borrower income was verified and minimum credit standards had to be met. Mortgage payment and debt-to-income ratios also had to fall within established guidelines and in the case of adjustable rate mortgages, the borrower qualified at the "worst case" payment level.
To make it easier to purchase a home and to finance more expensive homes, alternative lending options were developed. Hence subprime and "Alt-A" loan programs were developed and expanded. Mitch Ohlbaum, president of Legend Mortgage in Los Angeles, was recently quoted as saying, "Twelve months ago, it was sort of anything goes. The (loan) rules were slim to none. Everyone was coming out with more aggressive deals every day."
Subprime does not refer to a specific product but to borrowers who either do not meet conforming mortgage credit or income standards or to properties that are higher priced and require jumbo loans (loans above $417,000 in 2007). These loans almost always carry higher-than-conforming interest rates and many of these loans were approved with no down payment. Many borrowers used a simultaneous first mortgage and a second home equity loan with little or no down payment involved. Some mortgage products were adjustable rate mortgages, or ARMs, that had initial teaser rates that were very low and adjusted to much higher rates very quickly.
When one combines more expensive loan products with slower appreciation and slower home sales, foreclosures often result because the owner has no other way out.
Washington's market
Where does Washington stand in the delinquency crisis? "Substantially below the national delinquency rates for all types of loans - both for serious delinquent loans and all past due loans," a Washington state Department of Financial Institutions presentation of September 2007 stated.
The presentation showed that at the end of the second quarter the percentage of seriously delinquent loans nationwide was 5.5 percent while the percentage was 2.62 percent in Washington.
All of this has occurred while mortgage interest rates, taken from Freddie Mac's Weekly Primary Mortgage Survey for 2007, have stayed relatively stable. Conforming 30-year fixed rates were below 6.5 percent for 40 weeks last year, and one-year adjustable rates were below 5.75 percent for 44 weeks.
Currently, 30-year rates are about 5.69 percent with a 1 percent fee and one-year ARM rates are at 5.26 percent with a 1 percent fee.
So, what will 2008 look like? All indications are that rates will stay as they have this year with possible increases toward the end of the year. There will be lots of homes on the market to choose from and it will be more of a buyers market than we have seen in the past six years. The first half of the year will be the most affordable for home buyers.
The really big change will be in the mortgage products offered and the detail that will be required by lenders in qualifying borrowers. The mantra of the mortgage industry is "BACK TO BASICS"!
Subprime loans will still be offered to some degree (jumbo loans will be offered with improved pricing over 2007) but more documentation to verify that the borrower can in fact support the loan will be required.
Finally, it is important to remember that if 5.5 percent of the nation's loans are seriously delinquent, 94.5 percent of them are not.
But, if you happen to be one of the homeowners facing delinquency, communicate with your lender early in the process as a variety of options are being discussed in the industry and may be available to you.
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