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Skate to Where the Mortgage Market is Going
By Brian Chapelle
When Wayne Gretzky, arguably the greatest hockey player ever, was asked to explain his remarkable success after smashing all of the National Hockey League's scoring records, he said matter-of-factly, "I skate to where the puck is going to be, not where it has been." While that is sage advice for any aspiring hockey player, it is also excellent advice for all of us in the housing industry as we try to make sense out of the unprecedented volatility taking place in the mortgage market today.
Over the last few months, we have all seen the market's response to the poor performance of the subprime sector. The clamp-down on this business has been swift, the judgment harsh. A number of subprime lenders have gone out of business. Wall Street investors are eliminating product features, imposing restrictions and requiring risk premiums in product pricing. What will these changes mean for the future of the housing industry? In this column, I will try to heed Mr. Gretzky's advice and look to where the mortgage "puck" is going to be in 2008.
What's Influencing Mortgage Markets
In addition to the market forces at work, there are several other factors that will influence the mortgage markets in the future. First, we should not forget that the federal banking and state regulators have changes underway that tighten underwriting standards on nontraditional products (i.e. option ARMs and interest-only loans). The federal banking regulators have also published a proposed policy statement for subprime lending that will likely take effect this summer.
The net impact of these underwriting changes will be to eliminate the use of option ARMs, interest-only mortgages and subprime ARMs (2-28's and 3-27's) as a means to qualify homebuyers. The contraction of these products as an affordability tool will inevitably reduce the purchasing power of affected homebuyers. The regulators simply do not believe that these products should be "mass marketed" to a "much broader range of consumers" to paraphrase John Dugan, Comptroller of the Currency.
A second factor that must be considered will be the performance of loans over the next several months. The key questions are yet to be answered: Are we approaching the bottom with respect to subprime defaults or will performance problems continue and possibly spill over to other products?
Unfortunately, the preliminary news is troubling. Loan Performance, a subsidiary of First American Real Estate Solutions and the industry leader in mortgage performance figures, has just released data that "60+ day delinquency rate of 2006 Alt-A ARM interest-only loans is running at four times the level of 2003-4 vintages." If this weakness persists in the coming months, it may precipitate another round of mortgage companies going out of business and influence federal and state legislative and regulatory bodies to take additional action.
A third condition that we must consider will be an increased attention at the state level, which is likely to result in some type of legislative and regulatory push from the state governments. At the recent round of Congressional hearings, many Senators and Congressional representatives expressed concern that non-federally regulated institutions offer a loop-hole for the continued origination of these problematic mortgage products.
Finally, there may be federal legislation this year that will modernize the FHA mortgage insurance program (i.e. lower downpayments and increased mortgage limits) and reform Fannie Mae and Freddie Mac. NAR is working diligently to underscore the importance of these agencies in addressing the issues facing the mortgage markets.
Government Comeback Inevitable
From all indications, there is little doubt that there will be a shift back to traditional conventional and government mortgage products. Time will tell just how significant the shift will be. To help you prepare for this change, NAR has developed training material to help your agents to understand and explain conventional and government programs. To paraphrase Wayne Gretzky, it is time to move to where the mortgage market is going and not where it has been.
Brian Chapelle is a mortgage industry consultant. For more information please e-mail Brian at firstname.lastname@example.org.