More Evidence The Housing Market Is In Trouble

[Rage for Order]

from AP:

http://www.usatoday.com/money/industries/banking/2007-02-08-subprime-lenders_x.htm

NEW YORK (AP) — The mortgage industry plunged deeper into distress this week as two lenders said sagging home prices and higher interest rates are pushing many borrowers into delinquency. HSBC Holdings (HBC), Europe's biggest bank and a major player in the U.S. mortgage industry, said the market for "subprime" mortgages, or home loans to people with blemished or limited credit histories, is in trouble.

During the housing boom, many mortgage banks devised crafty loans allowing people to borrow money with no down payment and pay low interest rates for the first few years on adjustable mortgages. Now, as interest rates reset higher, more borrowers are missing payments and many lenders are going out of business or putting themselves up for sale.

Subprime loans were once very attractive to some banks because of their higher interest rates.

But HSBC said the weak housing market exacerbates credit problems in the subprime mortgage space. Until a little more than a year ago, stretched borrowers who needed to raise cash could take out a second mortgage on their houses and use that money to pay off loans. With housing prices stagnant — and in some markets falling — consumers' best source of financing has shriveled.

The problem for these types of lenders may not go away quickly.

More at the link.

The markets where home prices rose quickly are feeling this the most. I just got out of the residential mortgage industry because I saw this type of thing coming. I took a job in the commercial mortgage industry because it is much less sensitive to interest rate swings than the residential mortgage industry. Shortly thereafter, my former branch laid off 15% of the employees with no advance notice (I saw that coming as well, and it was one of the reasons I left). The credit requirements were starting to get tighteraround August of last year. In the span of about 3 months the minimum credit score required to get 100% financing on a home went up 60 points. Some sanity is finally starting to return to the mortgage industry, but many families are going to lose their homes because it didn't happen sooner.

[Bobbieo]

1. And I'm still hearing from Mortgage rate telemarketeers????

[fed-up]

2. so how many of those crappy/adjustable rate loans did you get paid for???? n/t

[Rage for Order]

4. Hundereds of them, actually

Although I wouldn't call them "crappy adjustable" loans. In fact, I have a 5/1 Adjustable Rate Mortgage (ARM) on my house. Despite all of the hype you hear in the news, most ARMs are not bad loans. The majority of the subprime loans we wrote were 2/28 ARMs, meaning the rate is fixed for the first 2 years, then adjusts according to the market once a year thereafter. In addition, there is a cap on how much the rate can adjust each year, usually 1.5% to 2.0%, thereby limiting radical increases in the effective interest rate. These are "band-aid" loans for people with poor credit histories, and they give them a second chance at cleaning up their credit. If you make 24 monthly payments on your mortgage without being over 30 days late one time, you can then refinance into an "A paper" loan when you have a higher credit score.

30 year fixed rate loans don't make any sense if you have a credit score of 560. The discount points you pay and the interest rate you get on your mortgage will be higher than what most people should seek on a 30 year fixed mortgage. However, paying a mortgage on time is one of the best things you can do to improve your credit. It's better to wait until you've improved your score to around 660 and have a solid mortgage history before trying to get into a long-term fixed rate loan.

That said, there are ARMs that 95% of the population should avoid: 6 month LIBORs, meaning the rate adjusts every 6 months. And definitely avoid any loan with negative amortization. These loans allow you to pay less than the interest that accrued for the month, but the interest you don't pay gets added to your principal and will have to be paid at some point down the road. These loans are often referred to as "Pay Option ARMs" or, in Quicken Loans' case, the "Secure Advantage" loan (which I find to be ironic, considering it makes people less secure). On the plus side, the federal gov't is beginning to lean on mortgage lenders to explain these loans in more detail in layman's terms or risk more regulation. The nation's largest mortgage lender, Countrywide, recently began providing in-depth information in easy-to-understand language in the hopes of avoiding more regulation. Hopefully more lenders will follow suit.


edited for spelling

[Dastard Stepchild]

3. I was wondering when this turnaround might happen....

I was never really looking at it in terms of loans and interest, although I know this had to be driving the push, but I do know that in a small span of five years, the ability for me to buy property in my city shot out the window.

I wonder if affordability will come back, or if people will attempt to hunker down and ride it out. Either way, it seems to have inflated not only the property purchase prices, but the rent prices as well. Which saddens me, because I have been effectively priced out (even as a renter) in many of the neighborhoods that I really like. And these weren't even tony neighborhoods to begin with.

I wonder what the next 5 years holds for my area.

[Rage for Order]

5. The housing and mortgage markets will self-correct

The tightening of lending standards and decreasing demand for homes will continue to drive out investors, which in turn will lead to falling prices. As the prices fall to more reasonable levels, people will begin buying again, but it will take the investors a few years to get back into the game because of the beating they're taking in the current market. That'll give the people who want to buy a home to live in a few years of normal markets. Of course, once the investors see that the market has stabilized and is going up, they'll get back in and the cycle will start over.