Mortgage market stormy, foreclosure rate ‘startling’

Professional Mortgage Group President Shawn Von Talge says his business has expanded since the subprime lending crisis weeded out local mortgage providers, but his overall view of the market, expressed on his blog, is decidedly grim.

“To put it bluntly this has been the worst two-week period for mortgage rates that I have seen!” Von Talge said in a June 16 posting. The rates on 30-year fixed loans spiked a half-percent and mortgage applications dropped about 9 percent, prompting this post a few days earlier:
“All of this, in light of a struggling national housing slump, increased inventory of homes and much tighter lending standards. Have you seen the movie ‘The Perfect Storm’? Well, hopefully we end up better than the brave men aboard that vessel.”

Mary Wilkerson, marketing vice president at Boone County National Bank, said her main concern is not the market statistics; it’s the lack of confidence in the economy brought on by factors such as rising food and gas prices.

“It all comes down to consumer confidence,” Wilkerson said. “It’s not about reality. It doesn’t make any difference what the economists tell you.

People have to feel confident about the economy” before they will take out a long-term mortgage for a home purchase. “People don’t really have it.”

A few hours after Wilkerson made her comments, the news broke that the U.S. consumer confidence index in June dropped to a 16-year low. But Congress also was close to passing legislation designed to boost the housing market and help homeowners avoid foreclosure, and local brokers say the market is primed to give great deals to first-time homebuyers.

Locally, the record rate of foreclosures in Boone County is causing dismay, even though it is still well below the national average.

The annual number of foreclosures locally rose above 100 only five times in the past 20 years. But the number climbed to 143 in 2006 and jumped to 231 last year, and the rate is escalating this year. Through the end of May, 128 foreclosure deeds had been filed, making the year likely to break the 300 mark for the first time.

“It is startling,” said Wilkerson, whose bank is by far the county’s largest residential lender after Countrywide Financial. “It’s not so much the sheer numbers as the departure from the norm that is stunning.”

The foreclosure average for the entire U.S. has reached 87 for every 10,000 homes. Boone County has 53,000 homes, so even with 300 foreclosures this year, the local rate would lag well behind the national rate.

Although there has been no formal study of the foreclosure deeds, industry observers believe the subprime market – which at one time snagged 16 to 20 percent of local mortgage activity – accounted for the bulk of the foreclosures.

Community banks like Boone County National rarely if ever came near the subprime market, although theyt often made 100 percent loans on homes – something no longer available through a conventional lender.

The Fed’s fight to boost housing hits a snag

The five rate cuts by the Federal Reserve since last summer have had little impact on the mortgage rates that homeowners can secure, even though the central bank ballyhooed the rate cuts as a solution for the beleaguered housing market.

When the Federal Reserve announced Aug. 17 that it began the rate cuts, the average national home mortgage rate was 6.4 percent. The five rate cuts cut the Fed’s short-term benchmark rate for banks to 2 percent – enough to support a prime business rate of 5 percent.

But the mortgage rate has generally been above 6 percent for all of 2008. In June, comments by Federal Reserve officials about the dangers of inflation – and open hints about rate increases later this year – caused mortgage rates to spike up between 6.3 percent and 6.5 percent.

Many analysts consider mortgage rates more reflective of 10-year Treasury bonds, although that connection has loosened this year. Analysts like Von Talge now look for a closer relationship between prevailing mortgage rates and the yields of mortgage-backed securities. The value of those assets plummeted after the subprime fallout, but the lower volume has caused the rate of return to climb.
For many buyers, the current range of mortgage rates has been off-putting in light of the bargain-basement rates during the Fed-fueled housing boom, while veterans of the housing market remember much worse times in the 1980s when rates soared into the double-digit territory.

Wilkerson acknowledged that the Fed’s action last August had kicked off unfulfilled expectation of lower interest rates for housing. “The Fed has been attempting to stimulate the short term,” not the longer-term rates for housing, Wilkerson said. “They think it will stimulate investment,” particularly by commercial clients in construction and other activity, “but it doesn’t affect the you-and-me kind of borrowing.”
The housing market in Columbia declined rapidly during the last half of 2007 and continues its slide in 2008.

The number of single-family homes sold dropped from 404 in the first quarter of last year to 323 for the same period this year, or by 20 percent. The trends continued in April and May when the number of units sold and their value slumped by 10 percent or more.

Although area data does not track individual properties, aggregate information does suggest that values on existing homes have slumped after years of record activity. In both April and May, median sales prices dropped 3 percent. However, brokers point out that homes in some prices ranges, particularly below $200,000, are selling well and appreciating in value.

Although the area’s designation as a “declining market” in late winter attracted much attention before it was revoked, it had little practical impact because secondary lenders were already requiring larger down payments that the designation entailed.

The Columbia Board of Realtors has gained high marks for its stimulation of continuing education and communication that have eased the functioning of the local real estate market. But the factors that have wreaked havoc in local expectations – the subprime mess, an oversupply of housing inventory and higher interest rates than found during the housing boom – have combined to douse activity.

Real estate returns to old-time values

Overall, the mortgage clock generally has turned back to around 2002, before the industry loosened its standards and subprime lenders moved into the market. At that time, economics advisers looked to real estate to save the country’s economy from the 9/11 attacks and the dot-com busts. The Federal Reserve churned up liquidity that fueled the worst excesses.

Reversing themselves, changing requirements from secondary lenders – the federally chartered Fannie Mae, Freddie Mac and Ginnie Mae – have helped restore the old days when buyers had to have existing home equity or substantial savings to afford a home or hope to buy a larger, more expensive one.
Unless buyers qualify for federal programs like rural development loans – available only in Ashland or Centralia, not Columbia – they must have at least 3 percent down payments, ranging up to 20 percent. Private mortgage insurers and the secondary lenders may have more stringent requirements, and Fannie Mae and Freddie Mac generally do have higher interest rates that they assess mortgage borrowers with credit scores less than 680.

Wilkerson and other lenders emphasize that banks have their own portfolios that may allow them to make loans that otherwise would not meet these standards. But if a bank cannot sell a loan in the secondary market, the borrower faces the risk of higher quotes on the interest rates.

The market generally has been cleared locally – for almost two years – of subprime lenders and others who allowed marginal buyers to move into homes, often without adequate income and little proof of their assets.

The subprime lenders primarily existed off mortgages and rarely expanded on their business after the final mortgage papers were signed. They were known as “transaction brokers” rather than the “relationship brokers” that typically would include community banks.

Von Talge said his company has been able to expand in the past two years to fill the void left by many of these transaction brokers that literally vanished.

Industry personnel also noted that the lenders most likely to make the riskiest loans included dot-com Internet operations that borrowers never met.

Ralph Gates, founder of Mid-America Mortgage Services and a 40-year industry veteran, still marvels that “people would turn to folks they had never seen for the biggest purchase of their lives” when they sought out lenders over the Internet.

Of considerable debate now, however, is the likely future of Countrywide, which expanded rapidly and by 2005 became the county’s largest residential lender. Much of its book of business included subprime borrowers.

By mid-winter, Countrywide was plagued by rumors of impending bankruptcy and eventually arranged its purchase by the Bank of America, although negotiations continue over the terms, which are set to be final this summer.

Bank of American could vault into the ranks of Boone County’s leading mortgage lenders if the sale goes through.

The winners? The new guys

In a market still flinching from the worst of the housing boom, who can benefit? Industry observers tend to agree on the answer – the first-time homebuyer.

Both Gates and Wilkerson said conditions favor that buyer, assuming he or she has earned the credit score and has access to the down payments that have become a passport to homeownership.

Gates added that such buyers could take advantage of a market that already was featuring entry-level homes at a discount because existing homes have borne the brunt of the downturn. “Prices are down,” particularly in relationship to potential resale value, Wilkerson said.

The oversupply in the local housing market has diminished, which bolsters price levels. Builders have erected fewer houses because price increases for materials were boosting their costs dramatically, and they could not afford to build and sell at a loss.

New homes sold in the first quarter dropped from 97 last year to a mere 58 this year. They are holding out against any cost-cutting, however. Both the average and median prices for new homes in the county increased by more than $20,000 or 10 percent.