THE MORTGAGE ISSUE
Just like the rest of the nation, it is no surprise that Florida’s mortgage market is experiencing challenges and has therefore moved toward more conservative lending practices. After talking to a variety of mortgage industry experts, the consensus is that a turnaround is near, but in the meantime agents can still focus on selling to first-time buyers and others who are well positioned to take advantage of the market as it stands.
By Meghan Boyer
Though Florida is a unique market highly sought after by buyers, it is not immune to the mortgage industry’s challenges. Following national trends, Florida’s mortgage market is difficult and will remain so until late 2008 into early 2009, according to industry experts. These challenges come from years of easy lending coupled with interest rate readjustments, which have led to increased foreclosures, tightened lending regulations and created more financial troubles for major lenders.
The Mortgage Bankers Association (MBA) forecasts purchase mortgage origination will fall by 15 percent to $31 trillion in 2008, from an estimated $1.18 trillion in 2007, before rising roughly 5 percent in 2009. Total originations also should decline 18 percent in 2008 from an estimated $2.31 trillion in 2007.
The MBA also predicts total loan originations will drop an additional 6 percent in 2009 from 2008, as the 5 percent increase in purchase originations partially offsets a projected 18 percent decline in refinance originations in 2009.
The Panhandle State
Two main factors are causing problems in Florida’s market, according to Jeff James, director of sales with Liberty Home Lending. The first is the continued illiquidity of no-income-qualifying and subprime loans, which has impacted move-up buyers and second-home buyers, he says. The second factor is lenders considering certain counties as declining markets because of rising foreclosures and dropping home values. If a lender considers a county a declining market, further guideline tightening may occur for borrowers who wish to purchase in that area, he says.
Mortgages are in a state of illiquidity because of an overabundance of sellers and a lack of buyers, notes Tracy Seskin Fogarty, senior mortgage banker with WCS Lending LLC. Credit contracts and markets have tightened, “resulting in a smaller funnel for mortgages to be channeled and sold,” which results in borrowers having greater difficulties obtaining credit, she says.
Despite the challenges that exist in the market, opportunities and loan options remain plentiful for buyers. “There is always real estate being bought and sold,” says Jose Caraballo, a mortgage consultant and branch manager for Source One Mortgage, who is also the president-elect of the Mortgage Bankers Association of Greater Miami. Additionally, the increased inventories of homes coupled with falling interest rates mean it’s a great time to purchase for first-time buyers and others who are financially able to take advantage of the market, says James.
Conservative Banks Tighten Credit
In this market, borrowers face more stringent guidelines from lenders, including larger down payments and higher credit score requirements. The “come one, come all” mentality prevalent in the mortgage industry through the past few years has changed, and “no longer can a potential buyer decide on a house, apply for a mortgage, not have any money saved, not prove income and move right in,” notes Caraballo. Florida’s mortgage market has moved into an “era of quality,” he adds.
Lenders are searching for buyers with a high probability of sustaining on-time mortgage payments and a low probability of default, which is a reaction to years of easy qualifying for buyers with low credit scores and low down payments. “There is money out there to lend, but the profile of the borrowers has changed,” Caraballo says.
Buyers who were approved for loans a year ago may not be approved today, and an obstacle for all buyers is the tightening of credit, says Seskin Fogarty of this credit-crunch market. “In the past, minimal down payments were acceptable and asset and income verification were not required,” she says. The universal effect of this on all borrowers is that it is more difficult to qualify for and obtain preferable rates and programs.
Because the market is now credit-driven, potential buyers are encouraged to routinely check their credit and take steps to either raise or maintain their credit scores, says Seskin Fogarty. Additionally, “Realtors need to understand that credit requirements for buyers have significantly tightened, so it is critical that they work with the right clientele to avoid lost effort and wasted time,” she says. “Realtors need to pre-qualify their clients early on in the home-purchasing process,” Seskin Fogarty recommends.
Loan Options Still Available
Though some lenders and loan options are no longer available, most homebuyers still have a varied and plentiful mix of loan options to choose from, according to industry experts. “Believe it or not, 100 percent financing is still available for qualified buyers, and both jumbo and super-jumbo loans are being written on a daily basis,” says Seskin Fogarty. “The mortgage market is incredibly resistant and new and innovative products will continue to be developed,” she adds.
As home inventories build and prices fall, the industry is responding by tailoring programs for first-time homebuyers, says James. “There are also county and state-funded down-payment assistance programs available as well,” he adds.
Government-backed securities also are prominent in the market. Federal Housing Agency (FHA) loans especially have “seen an enormous resurgence in lieu of the subprime market evaporating,” says Seskin Fogarty, adding that these were one of the leading mortgage products in 2007. James agrees: “I am seeing FHA reappearing as a good option for many first-time homebuyers.”
More loans are closing with private mortgage insurance, which has become an alternative to home-equity lines of credit because the Federal Reserve has increased the Fed Funds rate 17 times over the past few years, says Seskin Fogarty. “In addition, PMI is now tax deductible, allowing consumers to write a portion of their insurance off their taxes,” she says. Another recent change with private mortgage insurance is the requirement of larger down payments in areas of declining market values, adds Caraballo.
In addition to numerous loan options, there are ways for buyers to save money on their loans, say the experts. Borrowers who pay points can lower their interest rates and monthly mortgage payments. They also often can write off any prepaid interest applied toward closing, advises Seskin Fogarty.
The permanent buy down “is a very good practice depending how long one plans to say with the loan/property,” says Caraballo. “One can save thousands of dollars in interest over the life of the loan.” Buyers pay up front to obtain a lower interest rate for the duration of the 30-year loan in a permanent buy down, he says. Clients who choose a temporary buy down have a lower rate at the beginning of the loan term and an easier time qualifying for it.
Adjustable Versus Fixed
In general, most buyers are opting for fixed-rate mortgages over adjustable rate, because there is no longer a notable price difference in their interest rates. The interest rates for adjustable-rate mortgages used to be significantly lower than those of fixed-rate mortgages, and many buyers opted for adjustable rates, says Caraballo. In the current market, that price difference no longer exists, and more borrowers are choosing fixed-rate mortgages over adjustable rate, he notes.
“With over two trillion dollars in mortgage resetting, fixed-rate mortgages have surpassed adjustable-rate mortgages, especially since there is no longer the price disparity we have seen in years past,” agrees Seskin Fogarty.
Bad information in existence about adjustable-rate mortgages and declining home values are also influencing buyers to choose fixed-rate mortgages, says Caraballo. He adds that many choices still exist with adjustable-rate mortgages, though they have increased prices and added stricter guidelines because a large percentage of defaulted loans were adjustable-rate mortgages.
Investing, Flipping Down But Not Out
Though the numbers are lower, investors still exist. Instead of short-term, low-down-payment, high-risk equity players, the surviving investors are long-term equity players, says James. “Although the number of investors in the market has obviously decreased from two years ago, the relative quality recently has improved dramatically,” he says. Long-term investors are taking advantage of low prices and incentives from developers while putting down large down payments to improve cash flow while holding the properties, says James.
From foreclosures to glutted inventories of new constructions and existing homes, many deals exist for investors – and there are more to come. The most opportunities for investors are in the foreclosure and short-sale arena, says Caraballo. “If an investor is patient and well positioned, there is a lot of money to be made here,” he says.
Flipping, likewise, has slowed, but major players are still in the market. Though the majority of flippers are concentrating on other areas, specific niche investors are still making good money flipping, says Caraballo. “The real long-term players have stayed and will always be doing something on some level, where the inexperienced or over-leveraged investors are leaving,” he says.
Condos also have slowed in sales, but buyers can find good deals, says Caraballo. James agrees: “There are opportunities in condo hotels if the price is right for the purchaser” he says, adding that the key is sound financing if the buyer is not paying cash. “There are only a few lenders financing condo hotel projects currently,” says James.
In fact, many banks have ceased lending on hotels, condos and fractionals altogether, says Seskin Fogarty, who describes them as the riskiest residential property types. “As an unproven property type, the jury is still out as to future exit strategies for early investors,” she adds.
The Long And Short Of It
In the short term, agents must realize the banking industry has returned to its conservative roots, with more strict regulations and intensified buyer scrutiny. Despite the change, there is still a need for housing, and industry experts predict the market will turn around toward the end of 2008. Until then, agents can expect continued sluggishness and difficulty in the market, says Caraballo.
Credit will remain tight and the supply of houses will outweigh the demand for them in the short term, says Seskin Fogarty. “A correctional period will strain both buyers and sellers and compromise will be needed to complete transactions,” she adds. Agents and their clients should focus on “bank-owned properties and short sales to hedge themselves against possible future depreciation,” says Seskin Fogarty, adding that many banks have real-estate-owned departments and are looking to unload properties at 70 percent of their current value.
Looking ahead, the market will gain traction and begin to flourish again. This will happen once credit loosens and tax legislation is finalized, says Seskin Fogarty. “Both these catalysts will be driving forces in the future and will dictate the timing as to when we will see a recovery,” she says.
In the meantime, Caraballo reminds agents that in a place like Florida, a place with great opportunities where people want to live, real estate will always be bought and sold.
Jose Caraballo
Source One Mortgage
Coral Gables Branch
305.968.1257
Caraballo12345@comcast.net
Tracy Seskin Fogarty
WCS Lending LLC
561.864.2448
tfogarty@wcslending.com
Jeff James
Liberty Home Lending
561.702.9548
jjames@libertyloans.com