Home Sales Plunge and the Mortgage Market Tightens

Mortgage Market Must Prepare To Lend To Worthy Borrowers

Existing Home Sales Plunged 27.2% in July, settling to a level not seen in this country since 1999. This number is considered a driving force to the Dow’s drop of 136 points on Tuesday, 8/24. High ranking officials from the National Association of realtors (NAR) are expecting annual home sales to increase greatly over the last 4 months of 2010, predicting home sales will rebound from their existing annual run rate of 4.65 million homes to exceed 5 million. The stimulus package at its height had home sales running at an annual rate of 5.66 million homes.

Ironically, due to business and tax incentives, Toll Brothers Home Builders posted a profit for the quarter for the first time in 3 years.

All this at a time when mortgage rates are just above 4%!

As I stated in this space back in June, homebuyers save more now and increase their purchasing power with rates at their present levels than before the sunset of the housing credit back in May. Actually, it is not even a comparison. Do consumers really need a marketing campaign of “First Time Homebuyer Tax Credit” to realize now is the time to buy? I hope not.
What needs to be pointed out is that there continues to be conflicting forces in the mortgage market:
Little to no private activity in the ABS markets. This cannot be overstated because it drives consumers into the grasp of Fannie, Freddie, HUD and VA programs. Portfolio bank lenders that choose to operate and lend in the residential mortgage market are being forced to mirror these guidelines in many ways due to the banking bailouts of a few years ago. Further, they are limited in the type of risks they can take. Private entities are very cautious to enter the residential mortgage market as well. Pretend for a moment they can overcome their bearish outlook on jobs and housing values…the regulatory environment when dealing with residential home mortgages is so punitive, rewards and ROI do not outweigh the risks enough to enter this market with any fanfare. Non-prime lending roots began by originating the low risk, common sense loans that banks (due to Fannie, Freddie and FHA limitations) were unable, unwilling or incapable of writing.
The Federal Reserve Board has passed new regulations that will limit how mortgage brokers and loan originators can be compensated for the services they perform. On the heels of unprecedented reform of how mortgage originators operate (licensing, FBI background checks, bonding, education requirements, etc…), compensation is now being thrust into the forefront. Mortgage brokers and retail originators have always generated a large percentage of the mortgages written in the United States. They (as all banks and lenders ) are required to comply with state and federal high cost thresholds, rate and fees restrictions, document compliance, etc…, why would compensation be further limited in what has essentially become a commoditized market? These organizations should be incentivized to exist, the most successful and experienced professionals motivated to thrive…not potentially exiled. Competition is the best regulator for consumer cost (I think I learned that with the Boston Tea Party lesson in grade school)…why would that not be held sacred?
Fannie and Freddie continue to mount losses, resulting in setting tougher standards for borrowers to qualify. Regardless of credit score, loan to value, debt to income ration or previous history…every loan is looked at in today’s market case by case on its own merits. Lenders are forced to make decisions so that there is little to no risk involved in a transaction…and that any subjective information is dressed up to be objective. Very difficult to stimulate housing when someone putting 40% down on a property may not qualify for a mortgage because of a minor administrative issue.
FHA has increased the amount it charges for mortgage insurance premiums to cover for future losses that may occur in its portfolio of originations. Interesting that these loans are regulated and insured through a government agency. Did you know that FHA delinquency is higher than non-prime delinquency was managed to?

As a mortgage professional that is dedicated and passionate about this industry properly balancing risk and originations…I would really like to see a little more offense in the game. There is too much defense being played here, and unfortunately, there is no accountability or downside for being slow, deliberate and conservative. Banks have access to what is termed “free money” yet continue to tighten qualifications for borrowers to access it. If mortgage guidelines do not start incentivizing borrowing, we will continue to see what we are seeing daily: lack of job growth, lack of consumer spending, sluggish home sales and poor consumer confidence. I am smart enough to know the entire economic condition of the country does not hinge on the mortgage market alone…there are many other factors in play. However, I do know a recovery will not be sustainable without it.
I keep hearing about a “double dip” recession. What is the term for a third one…”triple threat”?