Planning on selling or buying a home in Raleigh, North Carolina? Concerned about the turmoil in the mortgage industry? There may be good reason for some concern. Things have definitely changed. This article is the first installment in a three part series that addresses this critical issue.
You cannot turn on the news without hearing about rising foreclosure rates and lenders whose future stability is in question. Or worse yet, lenders that can no longer fund client loans at closing. A recent example is HomeBanc, a lender with operations here in our Raleigh market that many of my clients had done business with in the past. Yikes… this is hitting pretty close to home folks! We need a better understanding of what we are dealing with.
Let’s start by identifying more exactly this so called mortgage meltdown.
It started back earlier this year with a sharp increase in foreclosure rates. The rate of existing loans that were delinquent also began to rise. As the experts began to analyze the situation, not surprisingly, the bulk of the increase came from borrowers who had marginal qualifying ratios and either financed 100% of their purchase, or did this in combination with an adjustable rate mortgage.
Since that time foreclosures have continued to climb. Some lenders have gone out of business while others have had their future stability publicly questioned. And as usual, fear of the unknown has a firm grip on most everyone who is involved.
So how many homeowners in foreclosure are we talking about? According to Foreclosures.com, 3% of US home owners have lost their homes to foreclosure this year. This represents a staggering 41% increase over 2006. Almost a quarter million properties have been foreclosed on in 2007. It is estimated that several hundred thousand more homeowners are delinquent on their payments.
As a result of this increasing consumer default rate, it has been reported that over 100 lenders have closed. Most notably, however, is the massive tightening of credit standards and qualifying ratios that have resulted. This is what will have the greatest impact on home sellers and buyers in the greater Raleigh real estate market.
What has changed as a result of the credit crunch?
Two things. 1) A good credit score is more important now than ever before. 2) Full documentation is now required where is was not in the past.
Based on my conversations with several lenders, here are a few changes Raleigh home buyers and sellers need to be aware of.
- Sub-prime borrowers, those with credit scores below 625, cannot easily obtain 100% financing. Full documentation is being required for all borrowers who fall into this sub-prime category.
- Conforming clients are defined as those who have 5% down, good credit, and can provide full documentation. For this group nothing has really changed. 100% financing is available to these borrowers with full documentation.
- Clients who would otherwise be considered conforming, and wish to obtain a no documentation loan, should be prepared to pay a hefty premium… or present a 730 plus credit score.
- Mortgage insurance will be an option now in many cases where a combo loan was used in the past.
If you are a financial or mortgage professional, I would really appreciate your comments. So would the many Raleigh area home buyers and sellers who will read this article.
Be sure to check back in the next few days for part two where I will discuss the specific implications for home buyers and sellers in the Raleigh market.
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very good info. recently I faced problems buying a house. nobody would give me loan with a score of 640. They been asking for 15% down.
As a lender with a joint venture of Wells Fargo, I must say that I’m happy I work for a company that is extremely stable during these times. However, that’s not to say that we haven’t been impacted by some guideline changes. Many buyers who need a loan will not be impacted by this “credit crunch”, however, some “out of the box” loans have been done away with and people wanting 100% financing, no doc loans, etc may find that either they can no longer qualify for what they could a month ago or it is a lot more expensive to do so. People wanting 100% financing should not be alarmed – there are still many products out there to achieve this – it just will not likely be in the form of an 80/20 loan that they may have previously obtained.
Recently an associate in my office presented an offer with a approval letter from a very reputable national lender and the listing agent was having a fit about accepting the offer with the financing through this particular lender. She had heard some rumors about the company going bankrupt. As you mentioned above this lenders stability was definitely questioned.
As a mortgage lender, I would add to your comments that the news media is definitely over-hyping this situation. Rates are still at historical lows and there are hundreds of banks out there that want to lend money to qualified customers.
Meltdown or collapse of the mortgage industry is not an appropriate description. A more accurate description would be a “correction”, which is similar to what we see in the stock market regularly. The fundamentals of lending still hold true for any home buyer. Consult carefully with a mortgage professional that is honest and trustworthy. Listen to their advice. Shop for the best offer. The choose the best offer and the best person to handle your transaction. Banks want to lend money and people want to buy homes. It’s simple.
Thanks for your perspective, Sheri. The main things that seem to have changed are the more limited availability of 100% financing and the increased level of income and asset documentation required. By the way, I’ve heard lots of good things about the strength of Wells Fargo throughout all of this.
Hi Janis – As listing agents we all will have to be more cautious regarding buyer financing when evaluating offers for our sellers. Our fiduciary duties will require this in light of the changes in the lending industry. Thanks for your comments!
Bob – good comments. Whether its called a melt down, correction, falling sky or anything else. The bottom line is and has been too many loans were written to make a quick buck for buyers who never should have bought a home at the price they did. The main concern is the challenge before us to correct, salvage, and recover. Through a positive approach, lender willingness to accept a level of loss, responsible media reporting and time this will all be behind us. Unfortunately, 20 years from now we may be reading the same information all over again if lessons are not learned and retained.
There is no doubt what we are experienceing today is unprecedented in the real estate and mortgage industry. The mortgage meltdown of 2007 is or should be categorized as a category 5 hurricane. If you were to try and compare the economic damage of this financial storm to a hurricane it would be very difficult since the economic loss have been over $2 trillion in the global markets.
What is next for real estate market? With changes to the credit tightening you will see about 15% of the buying population being removed due tightening restrictions.
The borrowers who will be caught up in this mess are the ones who are looking for reduced document loans to no document loans. Individuals that can provide full documentation (pay stubs, W2’s, asset statements, and can verify employment) for vanilla type loans will be fine. That is what was once required in the mortgage industry before we got into all of the stated and reduced document loan programs. Government loans will pick up a lot of the slack for those individuals with credit issues and minimal down payments.
This is definetly a correction time in the mortgage industry and we will all weather the storm. We as a industry will just have to go back in time when someone wanted to buy a house they had to provide the required documentation that lenders required. There are plenty of banks and investors out there that are and have the funds to lend qualified borrowers and there always will be.