The Mortgage Issue
After several years of lax income documentation and fringe product debacles, the mortgage industry is putting its foot down when it comes to strengthening requirements for lending. Add to that a static interest rate, and 2007 will likely see a slight drop in overall mortgage volume, according to industry experts.
By K.K. Snyder
The Mortgage Bankers Association is forecasting total residential mortgage production in 2007 to be $2.39 trillion, declining by about 5 percent from an estimated $2.51 trillion in 2006. Total mortgage originations should decline an additional 4 percent to $2.29 trillion in 2008 and drop another 6 percent to $2.15 trillion in 2009.
And no matter whom you ask, the 2007 projections are flat, with a projected rate increase of 10 to 20 basis points by year’s end. Now, buyers will come under increased scrutiny when applying for a loan. These impending changes to the process are crucial in keeping the industry healthy, says Salvatore Davide, executive VP for Home Equity Mortgage Corp., who has 18 years of experience in the industry.
“I think we’re seeing lenders getting much more cautious on the loans they’re making, especially on those who do condo conversion and construction loans for big projects,” says Davide. “We’re seeing the end result as lenders get more stringent on documentation.”
South Florida, like southern California and certain parts of Texas, comes under additional scrutiny by national lenders, because loan fraud rates are typically higher in those areas. “I think that’s something more of an area issue and not a national issue,” he says.
The market is changing guidelines, ?and there’s a shift to more conservative measures than those taken in the recent past, says Jonathan Shapiro, CEO of American Home Lenders Inc. “We’ve had those niche markets for borrowers where you name it, they were doing it, and almost anyone could get financed.”
Prior to Alan Greenspan’s departure, he issued warnings about the secondary market. “He was concerned that the niche programs were so aggressive that we needed to be wary,” says Shapiro, noting a few major mortgage companies, Ownit and Sebring Capital, that were forced to close their doors last year.
“We’ve seen other companies get bought out; they’re making lenders buy back these loans, because the default rations were increasing,” he says. “With programs tightening, it will tend to affect who will get qualified for a mortgage.”
Interest rates have come down and will likely hang around the 6.0 range, and the Federal Reserve hasn’t done much with the prime, adds Shapiro. “We hope [interest rates] will stay low this year to spark people to buy a house,” he says. “The market has flattened out on values, especially in South Florida, where you’ve got to keep the interest rates low to spark potential buyers to make that move to purchase.”
Shapiro also predicts that developers in the Miami area are going to get more aggressive with incentive programs, which might boost new home sales. “Developers want to get rid of properties and want buyers to step in and take care of some of this excess inventory,” he says.
With a background in financial planning and on Wall Street, Shapiro recognizes this is no longer a product-driven market, but more like the finance industry, and should be treated as such. “People have a financial advisor because they have $50,000 to invest, but they have a half-million-dollar house and don’t have a mortgage advisor,” he says. “A couple of years ago, everyone was a mortgage broker. But this is more of an environment driven by mortgage planning than mortgage product sales.”
Regarding overall sales for 2007, there really isn’t anything to celebrate other than the unlikelihood that sales will drop, he continues.
“We expect sales to remain steady or slightly increase,” says Rich Campanella, VP, Mortgage Banking Leader for Wachovia Mortgage. “At Wachovia, we offer a new product to help meet some of the challenges we face in 2007. Our Fixed-Rate Pick a Pay product is designed to meet the customers’ needs of a flexible payment. It also gives them peace of mind with a fixed rate. The average payment is less than most 50-year mortgage programs.”
With nearly 40 years in the mortgage industry, Patricia Hayhurst, owner of Hayhurst Mortgage and Hayhurst Title, says the biggest trend this year will involve fixed-rate mortgages.
“We’re seeing a refinancing trend to fixed rates back in the 6.0s, because these people who had loans three to five years ago are coming into the adjustment period and are seeing new rates in the 8.0s; their payments are going up,” says Hayhurst. “We’ve been seeing more purchases in the last month or so, because fixed rates are so good and people figure it might be a good time to buy.”
Much of the hullabaloo regarding fixed rates has to do with the government, says Hayhurst, noting that the deficit created by the war in Iraq has to be financed through treasury securities.
“What worked a couple of years ago isn’t working now because of the deficit,” she says. “It’s a real simple economic problem. They have to raise treasury rates to make them attractive enough for people to want to invest in securities. The more they go up, the higher the rates get. So the fixed rates are the trends we’re looking at.”
One thing that will work in favor of the mortgage industry and, ultimately, real estate agents, is a law passed by Congress in late-2006 that allows mortgage insurance premiums to be claimed as tax deductions for households earning less than $100,000 annually. The current legislation applies to new loans closed in 2007 only, and will require another act of Congress to be extended beyond this year.
The change to the tax code means that mortgage options that include standard private mortgage insurance will now become much more competitive and attractive, saving 2007 homebuyers or home refinancers an estimated $91,000,000 when they file their 2007 tax returns, according to a recent report.
“It’s got to be a good thing and it’s obviously some relief for homeowners,” says Davide.
Hayhurst agrees. “It’s going to keep people’s payments lower. You have those people who do the 80-10-10 loan to avoid having to purchase mortgage insurance, but the second mortgage rates are so much higher that when you average the two loans together, it comes out higher than if they did one mortgage with mortgage insurance.”
Not everything in the mortgage business is based on numbers, however. While Realtors can’t control the market, they can do a number of things to boost their ability to close deals, including building strong relationships with lenders.
“I believe this year is going to be a year of service,” says Campanella. “When you consider the forecast information from the Mortgage Bankers Association, especially the projected rate increase, it is more important than ever for Realtors and lenders to build strong relationships and work as a unit.
“Those Realtors who have good relationships with their lender will be able to provide additional ‘value added’ deals to help sell their properties,” says Campanella. “This could be anything from a discounted rate, equity line after closing, or even helping their customer get a safety deposit box close to their new home. The partnership provides a better picture of what the customer truly needs and how best to meet those needs.”
Both lender and Realtor should focus on making the customer a “customer for life,” and the best way to do that is to have a great working relationship, adds Campanella.
“You want the client to come back every time they buy a house,” Shapiro says. “If you team up with a mortgage professional, you can work hand-in-hand to accomplish the goals of that buyer, not to ‘yes’ the person to death, but to educate them.”
Real estate professionals can expect to ?get help from an emerging trend. A major change from a generation ago is the ?frequency at which people purchase homes, ?adds Shapiro.
“Unlike our parents who stayed in the same house all their lives, many now move every five years or so,” making customer services, satisfied clients, repeat business and referrals more important than ever. M.A.
Home Equity Mortgage Corp.
American Home Lenders
954.452.8310, ext. 233
Hayhurst Mortgage/Hayhurst Title