Home values after the subprime implosion
By: David Gibbons, Director of Community Relations | March 27, 2007
For weeks now I’ve been trying to post an overview of the subprime mortgage shakeout. I say "trying" because the detail in this story is moving too fast. Almost daily another mortgage lender seems to be closing their subprime operations — or tightening lending criteria — or updating financial projections — or announcing lay-offs.
One person who is keeping pace with the details of this story is Aaron Krowne, the (self-described) concerned citizen, who started a website in December 2006 to keep track of the shakeout amongst subprime lenders. The site is not subtle — starting with its title; "The Mortgage Lender Implode-O-Meter". Today, the Implode-O-Meter declares that 44 mortgage lenders have imploded which according to the site "is somewhat subjective and does not necessarily mean operations are ceased permanently: it can mean bankruptcy filing, possibly-temporary halting of major operations, or a last-ditch acquisition."
Most interesting is Krowne’s review of news from the top 25 subprime lenders. I’ve extracted these stats from the blow-by-blow detail on the Implode-O-Meter;
- 6/25 (24%) have shut down operations or are bankrupt
- 3/25 (12%) are no longer operating independently and
- another 6/25 (24%) have announced some financial difficulties
- only one of the top 5, Wells Fargo, has not announced trouble relating to subprime loans
With 60% of the nation’s most popular subprime lenders reporting some kind of financial trouble, it’s clear that many recent borrowers are already caught up in this tragedy.
My question is; how will the subprime implosion impact the value of homes in the US? There seem to be several possible scenarios and I’m interested in your opinion. It seems clear that this will cause some increase in the supply of homes for sale and some decrease in the number of borrowers who qualify for mortgages. What is not clear is whether the subprime portion of the mortgage industry is large enough to have any real impact on the value of the average home. That said, consumer sentiment seems to have a disproportionate impact on the value of homes and this story has massive potential for hype. What do you think will happen to home prices as a result of the subprime implosion?
- Stumble it!
- Categories: Home Mortgage, Real Estate Industry, Refinance
Comments
10 Comments so far
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BrianLockhart on March 27, 2007 1:30 pm
Mainstream media hype has already begun, and it’s just a matter of time before Dateline, etc. run a fearmongering lead story about subprime meltdown.
http://www.msnbc.msn.com/id/17814371/
ca dave on March 27, 2007 2:57 pm
It’s not just fear mongering. Rates of appreciation have been so far above the historical norm for so long that it was only a matter of time before some of these imbalances shook out and we returned to something more normal.
What’s clear now is that subprime lending, which has become a huge portion of total originations (1/5th), has been subject to extremely lax lending standards, letting un(credit)worthy buyers get into the market with cheap money, further inflating asset values.
Will subprime impact the total market? My question is, how will people trade up? To buy your McMansion, you need to sell your starter home, and its buyer needs to sell his/her condo, and so on… The subprime sector is not entirely insulated.
The next shoe to drop is the data emerging now that illustrates deteriorating loan performance among prime and alt-a mortgages based on non-traditional loans. ARM and teaser rates will prove to be the biggest culprits. Subprime gets whacked first because they are the least financially sophisticated audience but alt-a is showing signs of distress already.
I’m not fear mongering. I’m just presenting a case that shoddy lending pumped up prices and that lending took place across the board, not just at the margins.
Tim on March 27, 2007 8:05 pm
I believe that 1/5th of the mortgages being originated by sub-prime lenders is probably conservative. The potential impact of mortgages offered with easy money/qualifying on the market locally (King, Pierce & Snohomish Co’s) is underestimated in my opinion.
As I’ve mentioned at Rain City Guide, the impact on the market due to lenders getting back to fundamentals is well under way.
The previous comment by CA Dave is very true. The move up buyers that are selling may experience longer periods on the market before obtaining an offer—due in part to the pool of first timers now having to qualify under tougher guidelines (lenders going back to fundamentals). This will clearly eliminate some borrowers from buying opportunities.
With many markets outside of Washington experiencing clear market shifts prior to the sub-prime problems over the last several weeks, I imagine the lender tightening will exacerbate a difficult market in those areas further.
-Tim
Legacy Escrow Service, Inc.
Everett, Wa.
Fred Klaus on March 28, 2007 7:43 am
The declines in our area (central Ohio) are primarily hitting the homes built new under 5 years old and sold to 1st time home buyers. Homes in many subdivisions that sold for $150K new get purchased back by the lenders via forclosure for $100K or less. Some subdivisions are 20% vacant and or listed. On the other hand homes 15 years or older in established built out neiborhoods are still going up in value!
Even in stable areas a larger problem is simply the amount owed and shortsales are used in many cases. We have been getting 20% to 40% off of our sellers mortgage balances in shortsales. Many of the folks in trouble did not have an agent or attorney represent them in original purchase, and generaly went only to the lender they where steared to. I knew many builder reps, agents and lenders that admited that certain tranactions where not suitable for the client but proceeded with out warning and hiding behind equal housing laws to do so. I beleive the untimate solution is that the RE industry must become more like the securities industry. Would anyone in the securities industry allow a 90 year old woman put 100% of her assets in a front loaded artic growth mutual fund? If it happened would she have clearly defined recourse? The same fine lady could be sold an adjustable rate mortgage with a balloon payment and monthly payments in excess of her income and no one would utter the word unsuitable.
Jason Kaminski on April 2, 2007 11:23 am
mybadcredithelp.com has good advice to people with bad credit.It well explains how to deal with bad credit.To get more details on bad credit and loans visit http://www.mybadcredithelp.com
Jo Jo on April 3, 2007 8:25 pm
The matrix was setup too have people in debt up to their ass sets and homeless. When Americans realize that the World bank(chase manhattan) owns 90% of the U.S realestate than you”ll understand the game of monopoly. If you have a home loan for $400,00 and a car loan for $40,000 and credit card debt you are broke and living above your means. If you cannot pay with cash you cannot afford it. Average Americans are poorer than ever and mislead, we are not living the good life we are living in debt.
That is why the state of Michigan is bankrupt and up for sale.
iknowall on June 1, 2007 10:01 am
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iknowall on June 1, 2007 11:48 am
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Michael Moran on July 8, 2007 2:18 am
“The residential mortgage industry is in a spiral that will take at least 12-24 more months to settle.” Michael Moran appraiser, July 2007.
“Now, about one in eight adjustable-rate loans (a quarter of which are subprime)…are in foreclosure. If lenders exercised poor underwriting in the subprime market, it’s likely their judgment in their Alt A and prime lending operations wasn’t much better.” David Lereah, Chief Economist for the National Association of Realtors, REALTOR Magazine, May 2007.
Look at the market inventories. They can’t stay afloat in the near future. They have to keep falling significantly.
This is due to irresponsibility in the business of real estate (sales, lending, inspections, appraising) which leads to a host of our now serious problems: foreclosures, negative equity, loss of capital, job losses, and recession.
Prices went up fast and they are coming down equally fast. Equally, no matter what some appraisals you have in hand may say.
Why can’t prices fall at the same rate (or faster) now?
Here is the everyday life of a mortgage broker: The market is flooded with lending choices for borrowers and the lender doesn’t get paid unless a loan closes. So they are motivated to keep the client satisfied. That’s essential in business. But this trend makes integrity practically impossible or difficult for the lending industry. An appraiser who does not ‘play by the rules’ and give ‘value conclusions’ that they want, is not going to get future assignments. The appraiser is therefore tempted to give a report that is favorable to the lender in many situations, one which is not an accurate value estimate and is rather inflated or too high. An appraiser who is thought of as ‘conservative’ or a ‘stickler’ is not going to get the regular volume of orders that others might. Why call an appraiser who seems to give lower value estimates or is critical? What is the incentive to? Is this dishonesty? Is this a crime? Is this fraud? Do lenders really care? You tell me what lenders may be saying when they talk to an appraiser.
Lenders regularly say to me, “Will it appraise for ___?” or ”I need a value of ___” and “I really need this to appraise (for a certain number).” Lenders and even real estate salespeople will tell me, “It didn’t appraise.”, when talking about a completed appraisal that has a value conclusion less than they expected, or if a sales contract price is higher than the appraisal valuation. “I hear it didn’t appraise.” What does this mean? What are they really saying? Are they saying, “Is this an accurate estimate in your opinion?” or “I really need a higher number.”
Unfortunately, lenders and agents generally hate appraisals being low in value. Why? Are they interested in objective expertise? Not necessarily. Are they concerned for one party over another? Yes. They are interested in their own personal interest first.
A Vice President of a major subprime mortgage lender in California said to me this month, “We can’t make loans if you put ‘oversupply and declining’ in the appraisal reports. Can you change just one of these?”
Most mortgage brokers and lenders think ‘an appraisal is an appraisal’. If a ‘certified appraiser’ gives a ‘value’ and if it can pass underwriting requirements needed to fund the loan, it doesn’t matter really how accurate the appraisal value is for the most part.
Will it sell?
And an economy that is run by such non-standards cannot stand for long. We are heading to a new real estate hurricane like the S & L days of the Resolution Trust Corporation. You heard it here…
Great subprime mortgages on September 22, 2008 12:45 pm
well, I just could’t believe this was on the news on such a date, I was gathering information for a research and found it, thank you.