RISMEDIA, Oct. 23, 2008-This week, at this year’s Mortgage Bankers Association Convention and Expo in San Francisco, Chase distributed a document that offers a clear understanding of the housing bubble-encouraging industry colleagues and customers to be accountable and take on the responsibility to help make things right and restore the integrity of the mortgage industry.
Within the document, Chase takes a look back to 2001, the beginning of the modern mortgage industry, to 2007, the peak of the housing bubble. Lending guidelines were significantly relaxed due to an ever increasing demand for mortgage-based investments. This led to a surge in borrowing power, home prices and mortgage origination.
Other highlights include:
Investor Demand Soars. Wall Street firms quickly realized the profitability of mortgage products and created a demand for more and more mortgage-based investments. Lenders relaxed their lending guidelines to generate higher mortgage loan volumes. With more borrowing power, buyers were encouraged to stretch for larger homes, second homes and investment properties. Homebuilders saw the potential as well and built new homes at a record pace.
Mortgage Lending Standards Ease. In addition to expanded guidelines, lenders also lowered credit standards. Subsequently, borrowers were introduced to 100% financing, InterestOnly loans and limited-to-no documentation programs.
Home Prices Skyrocket. As borrowing power increased exponentially, so did home prices. From 1975 to 2000, the Compound Annual Growth Rate (CAGR) for home prices trended at 1.4%. From 2000 to 2007, the rate trended at 7.6%. Home prices were driven up by unsustainable borrowing power increases.
Borrowing Power Surge. Prior to 2001, a typical borrower could qualify for a loan amount equal to three times their pre-tax income. Beginning in 2001, borrowing power surged based on:
• Rising income levels
• Falling interest rates
• Higher debt-to-income ratios
• InterestOnly mortgages
• Low and no down payment options
• Increased credit availability
Where We Are Today
From investor demand dropping to the price of home prices plummeting, Chase offers a glimpse into the future, answering the question, “When Will Equilibrium Return?” by saying:
“Given the fluid nature of the values and the external influencing factors for our industry – regulations, interest rates, economic conditions, availability of credit, etc., to pinpoint the exact timing for our industry to reach the bottom of this cycle is more art than science. The best forecasting calls for the restoration of equilibrium to our industry in the first half of 2010. However, pending government intervention may impact the timeline for the return of stability to the market as well as investor confidence.”
According to Chase, in order to move forward, action is needed to ensure actions from the past aren’t repeated. What’s more Chase offers the following suggestions to help restore the industry’s integrity:
• Continuing the move towards realistic mortgage lending standards
• Returning to a rational correlation between income and borrowing power
• Accepting that home prices must return to a sustainable growth rate
• Working to restore borrower, investor and regulator faith in our industry
For more information, visit www.Chase.com.
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