The nation’s financial profile seems to be a moving target as we go to press. In early September, disaster loomed as the newest media star, U.S. Treasury Secretary Henry Paulson, made repeated announcements. On Sept. 7, he declared that the federal government would take over the giant mortgage firms Fannie Mae and Freddie Mac to help stabilize the housing and financial markets.
A few days later, during an interview with NPR, Kenneth Rogoff, a professor of economics at Harvard University and former chief economist at the International Monetary Fund, said the country was facing “the worst financial crisis since World War II.” Four days after that, the 158-year-old global financial-services firm Lehman Brothers collapsed into bankruptcy protection; Lehman rival Merrill Lynch nervously sold itself to Bank of America; and the Federal Reserve bailed out American International Group Inc. (AIG) with an $85 billion loan.
It was a succession of frantic moves taken to prevent financial catastrophe — and, as BBC business editor Robert Peston said, it was “Wall Street’s most extraordinary 24 hours since the late 1920s.” Then, one week further down the road, the Bush Administration floated the proposal to spend $700 billion of taxpayer money to buy “a mountain of bad mortgage debt in an effort to unfreeze the nation’s credit market,” as reported by the Associated Press.
The root cause was what, in hindsight, looks like hysterical optimism on the part of everyone in the mortgage industry, as they approved risky loans to legions of people who could only afford them under the conditions at the time. As soon as housing prices began falling in 2006, people found it harder to refinance, the popular adjustable-rate mortgages adjusted upward, and defaults and foreclosures climbed drastically. According to RealtyTrac Inc., there were nearly 740,000 foreclosures in the country in the second quarter, a 121 percent increase from the second quarter of 2007. In its most recent paper, RealtyTrac reported nearly 304,000 foreclosures just in August — including almost 500 in New Mexico.
The upshot of all this for the average, potential homebuyer in Santa Fe is that the days of securing a mortgage for a few hundred dollars are no more.
“In addition to the lack of buyer confidence and excess inventory, the market is severely affected by how the world has changed for buyers shopping for mortgage money,” said Realtor Alan Ball in a Sept. 5 market report. “The industry experts seem in consensus that the mortgage market has changed more in the last 18 months than at any time since the 1930′s. Primarily this is due to the almost complete lack of low/no down payment mortgage products. Indeed, buyers are learning they will have to behave like their parents or grandparents and actually have some of their own money to put down when they buy a home.”
Centex Homes, a Texas-based production builder in Santa Fe, has a program to help borrowers save for their down payment. “The options to get in with no down payment are very few,” said Diane Nielsen, branch manager for CTX Mortgage Co., Albuquerque. She mentioned the state’s Mortgage Finance Authority, which has a program for first-time homebuyers with income limitations.
Centex held an “Ask-A-Centexpert” event Sept. 20 in Santa Fe and may do another one if the interest is there. “We know that consumers have a lot of uncertainty about homebuying today, and these seminars are just our way to try to address some of those concerns,” Nielsen said.
Now let’s check in with a few local providers.
LANCE ARMER, SANTA FE MORTGAGE
Can people still get a loan for 5 percent down?
I have not seen a client come through my door that had 3 or 5 percent down and might have been able to qualify six months ago who doesn’t qualify now. But I think the news might be so widespread that that person sees no point in coming in. I have certainly seen a slowdown in the number of people calling. For example, yesterday I had more calls from former clients asking me whether their money is safe in a local bank than I had asking about mortgage issues.
There are like 85 Santa Fe businesses under “Mortgage” in the Yellow Pages. Do you happen to know if any of the small ones have folded?
I do know of small operations that have closed, although the majority have very low overhead. I think a lot of people that have been in this business, because you pay for your license by year and you pay for your insurance by the year, it is so relatively affordable to keep your phone number alive and have it roll over internally to a cell phone, you can create the illusion that you’re a fully functioning business.
Ten years ago I probably had 40 companies that wanted me to do loans with them. I only did 4 or 5 because you can only do business with a certain number of people. But I would say that that 40 is now down to 8 or 10, on a national level, and I fully expect that as the business devolves and consolidates, we’re going to see Santa Fe Mortgage being forced to choose one or two companies.
There’s a certain amount of business I do, and to keep the supply lines open, they’re going to demand a certain percentage of that business and, I think, to know that the business they’re getting is quality and that the representations I make are transparent and they can count on them. I think they’re going to eventually want to come in and have access to my files and books, and I don’t think it’s unreasonable.
What do you see down the road, then?
After everything shakes out, I think it’s going to look a lot more like the independent insurance business, where there’s a pretty limited number of agents in town, and less like Cerrillos Road used-car mania, and I think that will be fine. I think the business will be better. I think the consumer will have more good choices. But, yeah, the guy who wants to buy an investment fourplex condo at 3 percent down ain’t gonna get a loan.
Interest rates went down after the federal takeovers of Fannie Mae and Freddie Mac.
They did, and it’s gotten slightly easier to do them. But it’s only that good loan profile: 10 to 20 percent down minimum, decent credit, verifiable income. That loan sails through. Everything else is harder and harder to do. The underwriters that I’m dealing with are scared to make a mistake. A year ago, certainly five years ago, they were under pressure to move files through. Now they’re scared that something they did three months ago is going to come back and bite ‘em in the butt and they’re going to lose their job for a decision they made under different circumstances. A good example is if there was a person whose income was slightly questionable. Six months or a year ago maybe the underwriter would give him the benefit of the doubt. Now they just keep grinding away with the questions and eventually it wears down the borrower and the mortgage broker and everybody involved.
STEVE WELLS, LOS ALAMOS NATIONAL BANK
Have you seen an impact on mortgage originations from the Fannie Mae/Freddie Mac takeovers?
The thing we’ve seen initially is downward pressure on interest rates, and assuming that the market is price-sensitive, you would think that would increase originations but there are obviously some financial gyrations occurring that are making people cautious.
This a perfect buying opportunity. I’ve been in banking for 30 years and these are, historically, just some unreal interest rates. If you’re in the market for a home, I can’t see any reason that you would be waiting for anything better.
Can one get a loan with less than 10 percent down? And what about no-doc and stated-income loans?
We’re back into a real world where 20 percent down is a reasonable down payment for an investment like a home. We never participated in the no-doc market. We did very little stated income; only when we took a close look at the buyer to make sure there was the capacity to support the loan.
How’s the jumbo market going?
It’s not very existent. There’s no conduit, no landing place for those mortgages to sit. Every institution has some liquidity for some of these, but it’s not a program where you can go out and say we’ve got unlimited funds like you could before with Thornburg, which had a thirst for them and made billions of dollars with those kinds of mortgages. They’re good mortgages; there’s nothing wrong with them. There’s just nobody today that wants to buy anything that doesn’t conform to standard underwriting.
Treasury Secretary Henry Paulson told reporters on Monday [Sept 15] that as soon as the housing market is stabilized, the turmoil in the markets will settle down.
Yeah, and as soon as I stop eating, I’ll lose weight.
There’s a difference between banks and investment houses, and between banks and insurance companies. All this conversation about Morgan Stanley and all these banks that are having problems… those aren’t banks. Those are people who were in a different business and who decided they wanted to be in banking. They found out banking is not as easy as they thought it was. There is risk, and managing risk is an absolutely essential part of banking.
Should we be worrying about our money in banks? Is the FDIC in good shape?
I think FDIC is strong. I as a bank pay monthly and quarterly into the FDIC fund, and for that I have the full faith and credit of the government behind me and I have a series of regulators who assure that I operate my business soundly. I guarantee that banks are going to be paying premiums into that fund to replenish it at a rapid rate. We’re fully prepared, budgetwise, to expect that we will pay higher premiums for that guarantee that the government gives us, and that’s not because we have any problems. We are a community of banks and we all share the burden of that fund.
FRANCIS PHILLIPS, 1ST METROPOLITAN MORTGAGE
What impact have you seen from the government takeovers of Fannie Mae and Freddie Mac?
It has strengthened the bonds. Now they’re government-guaranteed bonds, so that caused the interest rates to drop up to a full percent over the last week.
What kind of minimum down payment are potential borrowers looking at today?
There are still some programs available for 100 percent. One is the VA loan. If you’re a veteran, you can still get that and there’s no mortgage insurance. There are also the MFA loans offered through state government.
And the typical person trying to buy a $500,000 home?
That’s 5 percent down. For an FHA loan at $417,000, the minimum down payment is 3.5 percent.
Are no-docs and stated-income loans still a go?
The no-docs are gone, but there are derivatives of stated income. If you show some nice assets — checking, savings, brokerage, retirement-account statements and good scores — then sometimes the tax returns are not requested. That benefits your self-employed borrowers, so, yes, there are some stated-income programs still available but there’s more scrutiny, more down payment, and a lot of times you have to prove the assets.
What kind of credit or FICO score is recommended now? Is 720 still a good score?
I recently approved a 513 score using FHA where the client had a really bad experience three years ago but turned it around and we could show they were back on their feet.
The Treasury Secretary said everything depends on the housing market. When will it improve?
From our 1st Met conference back in August, a lot of analysts were saying Americans who are looking for a bottom should be buying now. We feel the bottom is here. The forecasts are that we should see a lot of the inventory of homes sold through 2009 and 2010.
BOYD ADAIR, FIRST NATIONAL BANK OF SANTA FE
Tell us about the current minimum down payment.
There are still a few programs that will go above 80 percent loan-to-value, but most have pulled back their guidelines to closer to 80. You typically had any mortgage insured down to 80 percent or below for most banks, anyway. AIG, for instance — United Guarantee is its mortgage-insurance side — and a lot of the other mortgage-insurance-industry companies have pulled back on their underwriting guidelines much more strict than even Fannie Mae.
If you had 100 people getting a mortgage two years ago and if they’re in the exact same financial situation today, probably only 45 would qualify for a loan. With the demise of subprime and Alt-A financing and the impact that has had on prime financing, it’s all tightened up.
Are you doing stated-income loans?
We do not, and most companies don’t do them anymore, which is a difficult situation for the growing group of self-employed people everywhere, as it is on nonresident alien loans. This has put a lot of people in a situation where they can’t refinance, which just slows the whole market down.
What are the effects of the recent government actions?
Interest rates dropped at first, but they’ve already climbed back up. When that happened, Fannie Mae-backed securities almost became Treasury securities.
I think the thing that’s most likely to come out of the $700 billion bailout is inflation and that’s the biggest worry, that it would cause interest rates to climb back up. Also, rents are likely to climb with the potential for inflation and the fact that fewer people can qualify for a purchase.
The things that always worry me the most are jobs and foreclosures, and both of those appear to be relatively stable in New Mexico. I don’t think foreclosures are very significant. We don’t have any on our books at all, although we don’t have that much exposure to the residential market.
And the FDIC is in good shape? We don’t have to be nervous about our funds?
No, absolutely not. You’d only have to worry about that if you had to worry about the United States government.
By Paul Weideman |
From The New Mexican