If you think the worst is over for the U.S. home market, hold on to your hats.
The credit crunch is not only making mortgage financing tougher, it will force more homeowners into foreclosure. The surge of more bargain homes on the market will further depress prices. Along with a corresponding pinch on home equity, auto loans and credit cards, this pullback doesn’t bode well for the economy.
The credit industry has become an inadvertent cheerleader for a recession. Consumers who can’t borrow typically don’t spend on items such as homes, cars and remodeling projects. It’s a punishing economic boomerang of mass psychology.
Only those with above-average credit ratings will fare well in the purge of the riskiest kinds of mortgages from lender portfolios.
“It’s been a bloodbath,” says George Jenich, owner of Milwaukee-based Lender Rate Match LLC, which runs an online mortgage service. “Since the beginning of the year, 25 lenders have been dropped from our database who have either gone bankrupt or stopped lending. We’re down to 15 lenders now.”
Jenich said all but the largest lenders have curtailed or halted their offerings of the riskiest kinds of loans. That includes subprime, so-called Alt-A, stated income, no- documentation and 100 percent financing.
Congress, market regulators and the Federal Reserve are trying to prevent a liquidity crisis that will cripple the already depressed home market.
Yet it may be too late to contain the collateral damage. At the end of last year, there were an estimated 7.5 million subprime mortgages totaling $1.4 trillion, according to the Center for Responsible Lending, a research organization in Durham, North Carolina. Some 20 percent to 30 percent of those loans may result in foreclosure. All told, the center predicts more than 2 million Americans will lose their homes. It may be more if the credit crunch continues unabated.
In July alone, foreclosures almost doubled compared with a year earlier, according to RealtyTrac Inc., the Irvine, California-based property tracking service. Hit hardest were those who were trying to refinance but couldn’t obtain loans after their adjustable-rate payments rose.
Also hurt are those homeowners refinancing loans who have no equity or money down.
Jenich said lenders are most restrictive in Arizona, California, Florida, Georgia, Michigan, New Jersey, New York, Nevada and Ohio.
That means banks in those states will require more equity or cash and offer lower loan amounts. Not surprisingly, Nevada, Georgia and Michigan posted the highest foreclosure rates in the U.S., with California and Florida showing the highest total foreclosures, RealtyTrac reported.
The trigger point for what industry experts say will be the next wave of foreclosures is November — when the next resets are scheduled — and then in April of next year.
“This will put borrowers in a straitjacket if they need to find 100 percent financing since no products will be available,” says Jenich.
The credit industry will eventually adjust to the new reality of tighter standards after the free-wheeling, no-money- down days that ended last year.
It’s too late for regulating out of this morass, though Congress may be forced to compel secondary-market leaders like Freddie Mac and Fannie Mae to buy a wider range of mortgages and improve disclosure on loan contracts.
In the meantime, if you need a loan, you will need more savings in the bank and extensive documentation to prove income and assets. That was a safeguard all along. Why does it suddenly seem like a good idea to the industry and Washington?