The Other Shoe

Two months ago we wrote here about the perils of the mortgage industry. Since that time quite a lot has happened. One major mortgage provider has filed bankruptcy and numerous others are making major changes in their lending practices so as to avoid a similar fate. Smaller providers all over the country are closing their doors and even some brokers who were specializing in fringe products are finding it impossible to continue. The national media refers to the credit crunch and the possibility of a government bailout, so the casual observer could be forgiven for believing the sky is falling.

I have ranted for years, (often in this forum), that there isn’t anything remotely national about the real estate market. Each city, in fact, is made up of numerous micromarkets so that you may find one neighborhood in a metro area that is completely depressed, with nothing selling, while across town there is a boom going on. The mortgage lending industry is far less affected by local conditions and truly is more national in nature, which is actually the great benefit. It is stabilizing. I recall, early in my career, when we were dependent upon local thrift institutions for mortgage lending, frequently we would encounter true credit crunches. The lenders, who were dependent upon their depositors to provide the funds to lend, would have to stop mortgage lending until sufficient deposits built up for them to return to lending. National policies and institutions have made it possible for us to have a dependable supply of mortgage funds, a supply that is still available today.

When your favorite mortgage lender runs out of money to lend, that’s a credit crunch! What we are experiencing today isn’t a credit crunch, it’s an adjustment. There is plenty of money out there to borrow and the interest rates are still in the mid to low 6% range. In a credit crunch the supply is weak; therefore the rate increases. That is just supply and demand and that is not happening.

What “crunching” is, is the availability of loans for people who should not be borrowing. For years, the industry has been trying to develop programs that provide mortgage funds to anyone who wanted a loan. That meant high loan to value ratios, like 100% financing, for folks who had saved nothing. This means interest-only loans, designed to hold the payment down to enable you to qualify; credit lenience, to allow people with bad credit to borrow; reduced document loans, so you wouldn’t have to verify income or savings, and let’s not forget the adjustable rate mortgage that allows you to borrow at initially low rates, so you will be able to qualify for more, yet run the risk of not being able to afford future adjustments. There was nearly a program for every situation.

All of these fringe programs have created the difficulties that the mortgage industry faces today. Foreclosure rates are at an all time high because either the borrower was placed in a program that they couldn’t afford as they moved forward or the program left no incentive to try to save the property if things became financially difficult for the borrower. In other words, if you have borrowed 100% of the property’s value and have no equity in the property, what do you have to lose if you get in trouble?

To a major extent the lending industry brought these current woes upon themselves, although there is a share of blame for the borrower who enters into these mortgage programs, suspecting that they are going to have trouble.

The issue I’m having trouble understanding is the slowdown in the lending industry, as if all the media attention has somehow paralyzed the real estate buying public. Let me say this as clearly as I possibly can: affordable mortgage money is readily available! The financial condition of the lender who provides you with the funds is in no way relevant. If your lender files for bankruptcy, it will in no way affect you and unfortunately, you will still have to repay the loan. The Federal Reserve is poised to begin lowering interest rates, making it an even better deal for you to borrow on a straight conventional loan.

Truly, all the hubbub is over the most extreme of the mortgage products that were offered. If you have the ability to round up a 5% down payment and can qualify for the payments, you’re good to go. You can even still get closing cost assistance from your seller if they are willing. So don’t let all the media hype dissuade you: real estate prices locally are very stable, there is an excellent inventory of homes to select from, and mortgage funds are as affordable as they have been. Actually, as far as you are concerned, nothing has changed. The financial condition of your lender should have no bearing on your home buying decision. So if you think you would like to buy your first home or move up to that newer, bigger property, go for it; there has never been a better time.

Gary Straub is an independent real estate consultant and real estate professional for 36 years.