The One Year Anniversary of the "Credit Crisis"

In August of 2007 we knew that changes were occurring in the mortgage industry. What we didn't know was that while the owners of our company were on vacation, various investors and lenders would simply stop funding approved, ready to go loans. Leaving us here to desperately try to explain to people why suddenly they actually weren't buying or refinancing a home after all.

Like any good employee would do, we called the owners and whined, "Everyone is mad at us, what should we do?"

And like anyone with thirty years of experience in the field, on vacation with their family, would respond they said, "Everything will be fine."

The combination of perspective and Disneyland has an unbeatably calming effect, evidently.

And alas, they were right, as one year later we're all here to tell the tale, though it's still unclear if the worst is over.

Here is an interesting article about the beginning of the end of the mortgage world as we'd known it for several years.

And here is a terrific analysis of the various financial sectors that have been affected and the invasive steps the government has made (and is poised to make) in order to stave off a recession.

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New Tax Incentive for First-Time Home Buyers

The Housing and Economic Recovery Act of 2008 authorizes a $7,500 tax credit for qualified first-time home buyers. To qualify for the credit, a home must be purchased between April 9, 2008 and before July 1, 2009, and buyers must meet income restrictions. This tax credit combined with still relatively-low interest rates and house prices at a 5-year low make now a great time to enter the real estate market for the first time!

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Analysts See a Housing Market Rebound

According to this article, due to the combination of fewer new houses being built with an increase in the number of buyers who can afford to buy one (lower prices = greater affordability), within three years we should see a bounce back of the housing market. Lower prices create greater demand which creates higher prices. Good ol' supply & demand - never fails.

On the other hand interest rates are steadily increasing (up to about 6.25% for a 30 year fixed today) and if that continues, this forecast might be a bit optimistic. (So as to not lose perspective, rates were 6.125% a couple of years ago - we just had a nice dip this past winter.) As federal attention shifts to bringing down the price of oil, the bond market could continue to suffer and who knows how high rates will go. The increase in rates could offset the attractiveness of home ownership for buyers in certain areas so we'll see how things go.

In the meantime, here is an interesting analysis of what has been happening in Portland's market. We haven't suffered as badly as some, with any luck we'll snap out of it sooner too!

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The "Walk Away" Myth

Maybe you’ve heard about the disturbing new “trend” of people who can afford to pay their mortgages just walking away from their homes that have declined in value. As it turns out, it’s a whole lot of nothing.

The vast majority of people who are giving homes back to the bank were investors and/or speculators to begin with, and often they had been involved in fraudulent transactions. The others are the homeowners who are losing their houses because they can no longer afford the payments due to ARM adjustments (in some cases they had been involved in fraudulent transactions as well).

As this article points out, historically (as well as currently, according to actual facts) people will do just about anything to keep their homes – certainly they don’t destroy their credit and become renters (or homeless) just because of an unfortunate blip in market values.

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New-Home Sales Rose in April

A surprising market statistic was released for April: New-home sales rose 3.3%

For the short-term, this isn't necessarilly good news. The housing market is still in a slump and perhaps we haven't seen the worst of it yet, but there are some glimmers of hope:

One bright spot is that inventories decreased. The supply of homes at the current sales rate dropped to 10.6 months' worth from 11.1 months in March. The number of homes completed and waiting to be sold decreased to 181,000, the fewest since July.

Purchases rose in three of four regions, led by a 42 percent jump in the Northeast. They increased 8.3 percent in the West and 5.8 percent in the Midwest. Purchases dropped 2.4 percent in the South.

Sales of previously owned homes, which account for about 85 percent of the market, fell 1 percent in April, and the supply of unsold properties reached a record, the National Association of Realtors said last week.

New-home purchases, which make up the remaining 15 percent of the market, are considered a timelier indicator because they are based on contract signings. Resales are calculated when a contract closes, usually a month or two later.

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The Positive Fallout of the SubPrime Mortgage Crisis

The mortgage industry has been much maligned lately - partly deserved due to predatory and fraudulent loan practices committed by some. At the same time, the mortgage industry is a cornerstone of democracy, as without it, only wealthy people would be able to purchase property and build personal wealth from little to nothing.

The Federal Reserve has been criticized for not properly regulating in time to prevent such a widespread crisis as we find ourselves in today -- the result of unscrupulous lending practices. Therefore, Ben Bernanke and others initiated a proposal for some hefty regulations of the credit card industry. The credit card industry, like the SubPrime Mortgage industry, often preys upon the poor -- the one difference being, of course, that during "regular" economic times, mortgages help people increase their net worth and credit cards help them DECREASE it.

So while I wouldn't morally equate the two, if the mortgage crisis leads to increased responsibility on the part of credit card lenders, then that's one good thing about all of this.

Some of the things being considered are requiring a grace period before the payment is considered late, prohibiting the application of payments to the lowest-interest balance first and raising interest rates on existing balances.

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Lake Oswego Real Estate News

The Lake Oswego Review reported some interesting data on Lake Oswego's real estate market last week. According to this analysis property values are increasing even if potential home buyers and sellers are exercising caution due to the national news.

One source of confusion in this article is a local realtor states that lenders are more restrictive (which is true) and that "down payments are more in the 25 to 30 percent range."

I'm trying to think if I've ever seen a buyer who had 25 to 30 percent to put down on a house. Maybe once or twice over the past 15 years. Anyway, that statement just is not true.

Three to five percent down (depending on how expensive the house is) is becoming the norm now -- so would-be homebuyers don't need to panic. The vast majority of "tightening up" has been the elimination of Zero-down loans and Stated-Income loans.

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Who Benefits From a Housing Slump

MSN Real Estate writes this week about the other side of the housing slump equation. We all feel badly for those who are losing their homes, but not everyone is in such a gloomy predicament. On the other side of a person desperate to sell a house is always a buyer ready to snag a great deal.

Living in the Pacific Northwest, I can’t help but be a little bit envious of some of the people in this article. Getting a house for $50,000? Wouldn’t happen to me, unfortunately. Because we live in an expensive housing market to begin with, it’s not as easy to find the cash to put down, qualify for the payment or rent something out for at least as much as the payment in Oregon as it is in some other markets. (On the positive side, I suppose, it’s not as difficult to do that here as it is in, say, San Francisco.)

But there are still a lot of good deals to be found here – relatively speaking. And if the economists are right, the bargains will only increase over the next year.

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Hope Now

The government has put together a coalition of loan servicers and credit counselors to help people who are either in foreclosure or know that they are going to have trouble making their mortgage payments in the near future.

If you think you are going to have trouble, the sooner you explore your options, the more options you'll have.

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How Big is the Foreclosure Crisis?

Nothing excites the news media more than a big fat crisis. So I was surprised to read an actual honest analysis of the recent foreclosure data. If you follow the news regularly you'll probably be shocked to learn that most people are NOT, in fact, losing their homes. It's true no one is over the moon about their house's appreciation rate over the past year or two like they were in the good ol' days, but still.

This is not to minimize the stress and trauma of those who are struggling, only to point out that the collapse of western civilization is not necessarily at hand. We are in a down cycle -- it happens. It will turn around eventually.

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Portland Still Experiencing Positive Growth

Last week the Standard & Poors/Case-Schiller Home Price Index figures indicated that three of the twenty metropolitan areas tracked experienced positive (if moderate) growth. Namely: Portland, Seattle and Charlotte.



Portland is only one of three MSAs still experiencing positive annual growth rates. Portland has been holding strong with median home prices increasing month after month. Fourth quarter 2007 saw a 1.8% increase to $290,500 from $285,400 a year prior. “We have a positive economic atmosphere in our area. The current median sold price is up, due to a greater ratio of sales on the higher end,” says Jim Homolka, President of RE/MAX Equity Group, Inc.



I don't know that this is GREAT news, but we'll take it and hope for the best.

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Just When You Think it's Safe...

Right after I explained all of the zero-down financing options available to would-be homebuyers last week, I was greeted Monday morning by several memos from mortgage insurance companies effectively stating that conventional 100% loans are probably going the way of the dinosaur soon.

To back up, all conventional loan applicants who do not have a 20% down payment are required to have mortgage insurance. When you apply for the loan, the lender approves the loan subject to the mortgage insurance company approving your loan as well, thereby mitigating the lender’s risk.

For a while now, several markets have been listed by mortgage insurance companies as “declining.” Currently all of California, Nevada and Arizona are on that list. For a while Bend and Medford, Oregon have been on these lists too. But the latest list also includes the Portland metropolitan area (meaning Clark County, Washington as well). Seattle is still hanging tough (though Tacoma is on some lists).

But just to keep things confusing, every mortgage insurance company puts out its own list, and Portland isn’t on all of them. Neither is Bend or Medford. (Sorry to those it affects, but NV, CA and AZ are on all of them.)

The purpose for these lists is that mortgage insurance companies will no longer insure properties in declining markets to 100%. So as of today, we may be able to find a no-down conventional loan for someone (most lenders are still doing them, but as I said, subject to being able to insure them), but for how long depends on when the remaining mortgage insurance companies decide we’re in a declining market. Soon it might be that people will need at least a 3% down payment for conventional financing.

The good news is, HUD has thus far been unable to ban down-payment-assistance programs on FHA loans. Even better, FHA loan limits are expected to increase by as much as 30%. So I have a feeling we’re going to be doing a lot of government loans in the coming months.

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Of Course There's No Lull in Mortgage Pitches!

Naturally everyone is concerned about the current housing and mortgage lending trends, but some people really take their concern to the extreme, as in this article Monday from the New York Times. Of course lenders and realtor associations need to be held accountable and advise responsibly, but to suggest that they shouldn’t be advertising because we’re in a down market? That’s crazy. Here are a few reasons why:

1.The real estate market is cyclical. Just because home prices might fall a little bit over the next six months doesn’t mean that thirty years from now you won’t be glad you bought a home today.

2.A lot of people already have mortgages and if you think refinancing your loan to a 5% fixed rate (like a few lucky people did a couple of weeks ago) isn’t a good idea just because Countrywide Financial is having some difficulty right now – well, you can go ahead and pay too much if you want to.

3.The sky is not falling. There’s a lot of opportunity out there and the people who work in the industry are taking advantage of it if they have the means to do so. It’s unfortunate that some people are experiencing hard times, but that they have to get rid of their house is an opportunity for the people who have the money to buy them and for the companies who have the money to refinance them into something they can afford. If you want to hide under a rock because there’s a blip in the financial market, go ahead, but that doesn’t mean you’re the smart one.

Just like stock investors switch strategies to make money in a down market, so do real estate investors. As for what regular ma and pa homeowners and would-be homeowners should do? If history is an indicator, the odds are good that the sun will continue to rise every day for the foreseeable future and that Americans will continue to want to live in houses. Home ownership is not suddenly a “bad” investment, generally speaking.

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Listening to economists is often about as useful as listening to the weather report. The bond market didn’t respond positively yesterday to news that retail sales for January were higher than economists expected. February will be a good month for retail sales too if what we’re spending to say “I love you” today is any indication. Americans must really be feeling the pinch of this recession, eh? Unfortunately, that’s bad news for interest rates and we’ve seen increases pretty consistently.

Furthermore, everybody and their dogs are speculating about what will happen in Oregon when the new Fannie Mae loan limits go into effect. So far I’ve heard that Bend and Medford will increase to $430,000 and $425,000 respectively, but nothing on the Portland area. From another source, Oregon isn’t expected to raise limits at all, anywhere. As always, we’ll have to wait and see how it goes. The loan limits are calculated based on median home prices for each area, and in the Portland area we might already be where we need to be.

In other news the Oregon legislature is considering a mortgage reform bill – similar to the one that didn’t pass last year. Most of the line items are pretty straight forward (and for many are standard practice, but need to be legislated for the unscrupulous few) and some of the proposed items are already in place. For instance, brokers already have to disclose their yield spread premiums. But one thing that stands out is the line requiring lenders to verify the income and assets of every borrower – which means no more stated income loans. And there are instances when self-employed people really do have enough income for the loan they’re applying for, but can’t verify it in a way that meets Fannie Mae guidelines for a variety of reasons. Many lenders have stopped doing these “stated income” loans already, but it will really be unfortunate for a lot of high quality loan applicants if they go away altogether.

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Economic Stimulus Package

It's looking like George Bush is going to sign the proposed economic stimulus package. It's not obvious how, exactly, that might affect the declining housing market, but it may put $800-$1,600 in your pocket by June.

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Is Real Estate "Local?"

This is kind of a humorous article emphasizing the never-ending gloom and doom that is allegedly the real estate market. But I'm linking to it because it provides Countrywide's analysis of regions that are (or are at the greatest risk of becoming) soft markets.

The good news for Oregonians is that on a scale of 1 to 5 with 5 being the highest risk, we are a 2. The only “better” places are Alabama or Alaska, and who wants to live there?

Me neither.

The funny thing about this article and the people who commented on it is that anyone who’s been alive for longer than five minutes should know that the important thing is not that real estate markets are local (or how that line benefits real estate agents). The important thing that everyone with an ounce of sense knows is that the real estate market is cyclical. Just like the stock market, just like the economy in general. Things come up, they go down. Repeat, ad nauseum.

The person making fun of people who say there are “bargains” out there right now is just one more person who won’t be able to figure out how to create wealth for himself (or herself) during a down market. The economy isn’t about to collapse and California isn’t going to fall into the ocean and Americans will not stop buying houses. As I was discussing this morning with a good real estate agent friend of mine who has been in the business for over thirty years, the market won’t improve today and it probably won’t improve all that much this year, but it WILL come back around. It’s just what markets do.

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Mortgage Rates vs Federal Funds Rate

Last week we saw the lowest mortgage interest rates any of us have seen -- for about five minutes anyway. It was so busy here with people wanting to lock in an interest rate I didn't even have time to write about it. Now the rates are back to where they were the week before and we're catching our breath.

But still, people want to know, if the Fed cut the rates yesterday, can't they get an even BETTER rate today?

The answer is no. In fact, several lenders are re-pricing for the worse today in response to a rallying stock market. When the media reports on this issue, it's always confusing for anyone who doesn't work in the industry. Thankfully Bankrate.com published a really easy-to-understand explanation of what "the Fed cutting rates" means and what it doesn't mean.

It's always difficult to explain to people that the discount rate doesn't affect our rates in the way everyone assumes it should. Recently the prime rate was cut and if you have a HELOC, that's great news for you. But regular mortgage rates are determined by lenders, based on bond market performance and hedged against inflation predictions.

What that means is when the Federal Reserve cuts the rate at which it will loan to banks, the result is increased spending by manufacturers and businesses. This is how we avoid or reverse a recession and is inflationary in nature. Mortgage rates reflect the cost to borrow money plus the anticipated inflation rate. In other words, the rates are more likely to go up than down, based solely on THAT indicator -- still many indicators affect mortgage rates so they could always go either way.

Most of the "insider" buzz anticipates we've hit the bottom of the mortgage lending rates for the near future, but we'll see. Today the 30 year fixed rate is about 5.5%, which is about what it was a week ago too.

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What's Really Happening in the Real Estate Market

The February print issue of Money magazine has an interesting comparison. The median existing home-price dropped 5.1% over the past year. That’s no surprise to anyone, I’m sure, as we read the gloom and doom reports of the real estate market on the national news every day. However, what we don’t hear much about is that real estate is a localized market, and 62% of metro areas saw year-over-year price increases, including Portland. Here’s one local real estate agent’s take on what happened in Portland last year and what he thinks we should expect in the coming months. Be sure to check out the comments he received from some people who differ with his assessment a little bit.

No matter what market you’re in, however, the lending restrictions are occurring everywhere. As I mentioned recently, if you don’t have at least a 680 credit score, you won’t be able to take advantage of the amazing drop in interest rates we’ve been experiencing. By next month they could be even lower – it’s hard to believe given that a 15 year fixed rate is already only 4.875%.

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A Sub-Prime Loan -- Whether You Need One or Not

The New York Times ran an interesting article on Baltimore foreclosures today asserting that too many single women were given sub-prime loans and are now facing foreclosure as a result. (This after just last week they blamed the high foreclosure rate on racism.) As I read through the article I was thinking that in many cases this is probably just coincidence, since more single women than single men buy houses for one thing, and for another, single women often have less income than their male counterparts (and less savings as well, especially if they're raising children alone). But this statistic from FHLMC and FNMA gave me pause:

Freddie Mac and Fannie Mae, which buy loans from mortgage lenders, have estimated that 15 percent to 50 percent of the subprime loans they bought in 2005 went to borrowers whose credit scores indicated they were qualified for prime loans.

This reminded me of a person who applied to be a Loan Officer here and was currently working at a sub-prime company. The fees he told us they charge as a matter of course caused our eyes to bulge out of their sockets (and regular, standard mortgage loans that we do here are not “cheap” by anyone’s definition). Now we only try to find a sub-prime lender if we can’t possibly do anything else for a borrower AND they really insist they can’t wait the six months to two years to do what we advise and get their finances in order. But it occurred to me that if any random person, unknowingly, called a sub-prime lender FIRST, they would probably get a sub-prime loan – whether they needed one or not.

In fact, we just received a “thank you” note from a woman we refinanced out of a negative-amortization, adjustable rate loan that she took out last year. Her credit scores weren’t the greatest and she doesn’t have a lot of income, but if we were able to get her conventional, fixed financing last month, there’s no reason someone shouldn’t have been able to do it for her a year ago. It’s just so important to know who you’re talking to or to verify what you’re being told, particularly if you’re not educated on what is common and normal for the mortgage lending industry.

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Mortgage Lenders Behaving Badly

Both Wells Fargo and Countrywide have come under fire for alleged unfair practices.

Countrywide's lawyer has thus far been unable to adequately explain why it created what would appear to be correspondence with a borrower, after the fact, that had never been sent. On Countrywide's behalf, there are a lot of regulations and procedures that have to be followed by mortgage companies and one employee who "forgot" something can cause a big problem for those in charge. But, this story is just outrageous, and should never have happened. When a corporate attorney can't even come up with a defense for it, that really says something.

And Wells Fargo is not only being accused of predatory sub-prime lending, but of racism as well. A significantly higher percentage of black people than white people in the Baltimore area are facing imminent foreclosure due to exorbitant interest rates. It's also alleged that they were charged higher fees. As I've explained before, sub-prime loans are by their nature more expenive in terms of both rate and fees and they do often compensate Loan Officers much better than conventional loans do. But as I've also explained, the price of these are set by a pool of investors who are willing to loan money to people who are not worthy of receiving it - and they expect a return on their investment.

So the real question is did Wells Fargo prey on black people, in particular, by putting those who would have qualified for conforming loans into these higher priced loans or did this many people happen to have the profile of a sub-prime borrower? It will be interesting to see what the facts will ultimately show. In either case, the unfortunate fact remains that many low income people, regardless of race, were loaned money that they clearly could not afford to pay back due to lax underwriting guidelines. This is currently being addressed not only legislatively, but also by investors and mortgage companies who just don't want to risk any more of their money (or risk going out of business like so many competitors) amidst the chaos.

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