What will the NEW Mortgage Market Look Like?
My apologies for the lack of posts everyone, it’s been a little hectic here.
I wanted to change things up this week and instead of giving you a usual "Mortgage Market Update", I sort of copied Noah's last post and modified to my end of the business. After all, the post was very insightful and all of you gave excellent opinions and your points of view.
So, what do YOU think will happen with mortgages once strict regulation is in full effect?
Here is my $.02:
1) Underwriting Guidelines: A complete revamp of the entire credit policy. In a nutshell, a complete revisit to all guidelines to make sure something like what we are experiencing present day NEVER happens again due to mortgages. That said, Stated Income & Asset mortgages will only be offered once there is investor confidence in mortgage backed securities that consist of this feature. To get this, borrowers will most likely have to present a minimum 740/760 credit score as well as a nearly perfect financial scenario. I also think that the default back to Full Doc will be very high... Basically any questionable item to the profile of the loan will make it revert in to a full documentation file.
2) Declining Market Strategy: Hopefully with fair and correct lending practices in effect, as well as a solid secondary market, home prices begin to adjust for the better, banks and the GSE’s take away the declining market policy which adds premiums to rate, lowers the allowable percentage to finance, and is virtually wiping out the private mortgage insurance market.
3) Subordinate Financing: I expect this to make a huge comeback. The days of 80/10/10 financing via HELOC's or HELOAN's are long gone. However now that the government wants to buy up these products, I think banks will start to issue them again but this time under much tighter underwriting standards. These products are very profitable on the secondary market; I don't see why banks won't lend them out again.
4) Rates:
Conforming: Will have a closer relationship with the 10yr Treasury note due to the increased liquidity and will hopefully come down to levels of 175bps over the 10 Year.
Jumbo: Spreads will hopefully ease due to the availability of cash on the respective bank's balance sheet, as well as a healthier secondary market. I expect rates on 5/1 ARM to be around 5.75%
Risk Based Premiums: Gone or reduced.
5) Sub-prime & ALT-A: I am afraid to even mention these two, but I have to be realistic... I don't think we will see these anymore. I don't know if that’s bad or good… My take? FHA or the Federal Hosing Administration will be in place of these mortgages. After all, this is America.... The land of opportunity... I think the government wants to keep it that way and instead of selling the loans on the secondary market to private investors, it will buy and securitize them all by itself.
Now the 5 items above are basically assumptions. They are based on the assumption that banks will take the money FROM the government and lend it TO the consumer. Something that one bank, internally, has intended not to do.
Now let’s be honest here, I think a lot of us here expected many financial institutions to hoard the cash they receive from the Hank & Neel. So I don't particularly see this as a huge surprise, but I do think it goes against the whole principal of this "bailout" and deserves some regulation of its own...
What's your take?
Posted by Brian23
Mon Oct 27th, 2008 04:43 PM
I dont think rates will come down for the long run that much because I still think there will be some level of risk premiums. In the long run, I think rates are around 8%. I think maybe in the short run, it will stay low, but the cost of having this artificially low rates has yet to be seen. If it does stay low, then like you said, I can only envision individuals with a 750 FICO and higher getting loans. Then I could see the risk premium going away. Under that scenerio, home prices would havae much more to fall. Just my 2 cents.
Posted by uwsider
Mon Oct 27th, 2008 04:51 PM
Isn't this just going back to pre-boom lending standards (pre-1998). Whats the big deal, for the long term this all for the best. Imagine, making sure the borrower can really pay back the loan.. what a concept!
Posted by MortgageMan
Mon Oct 27th, 2008 05:02 PM
uwsider:
Absolutley agree.
In fact I never said that what I mentioned earlier was bad for the financial sector or the consumer. On the contrary I think the most essential piece of the puzzle is that borrowers only borrow what they can afford, and the banks MUST make sure of that.
Fair and correct lending practices should have always been enforced, unfortunately lax lending standards were HUGE in the refi boom. Money was very cheap.
Posted by MortgageMan
Mon Oct 27th, 2008 05:05 PM
Brian23:
Great point!
Due to risk of securitizing mortgages, the entities that lend the money have to charge risk base premiums. I'm just hoping that with time, they reduce the premium while still enforcing correct lending standards that will not hurt the economy or the consumer.
Posted by Noah
Mon Oct 27th, 2008 05:44 PM
the HANK & NEEL, love it!
Watch out for HIGHER RATES charged by the GSEs as their spreads widen!
http://www.bloomberg.com/apps/news?pid=20601087&sid=a41cLKNKkj34&refer=home
And I hate to say this, but I think an unintended consequence of all the printing we will be doing, is pressure on treasuries after the dust clears and debt is rolled over from previous auctions. We may see soft 10YR yields for next 6-8 months as economic weakness worsens and stocks are pressured. But once the smoke clears, I think yields will go sig higher and is a 2009-2010 play that may hurt borrowing costs as another chapter to this story. Not now though, later. Thats the key.
Posted by anonymous
Mon Oct 27th, 2008 06:33 PM
this is going to be the second thing that takes NYC real estate prices down - in other words, not only are potential buyers poorer (stock losses) and the bonuses are lower, but also the banks will lend less and at higher rates. i think the sellers that are planning the "out-wait the buyers" strategy will have to learn to take that into account - with more stringent/expensive lending, apts will become a lot less affordable. Sorry, it's a bit off topic but i think highly relevant to the mortgage market.
A question for you all - if banks perceive that the NYC real estate market is heading down, why would they make loans to buyers who put only 20% down? IOW, if (hypothetically) you are a lender and are foreseeing the market dropping 40%, why would you lend against 20% down?
Posted by Noah
Mon Oct 27th, 2008 07:06 PM
they need to make performing loans to make money, and I guess they think 20% is enough of a cushion these days.
The industry tightened standards on its own already, self corrected without any regulation yet. One way the system shows it works without intervention. Of course, this is as a result of massive deregulation and the excesses that came with it and ultra low rates
Posted by dw
Mon Oct 27th, 2008 09:46 PM
Was having a dinner conversation with friends and one guy came up with this.
Why don't the government just give out mortgages with people with 750 credit and higher a rate of 1-2% fixed with some stipulations like i.e. Must be a primary residence(no investors), must live for 5 years.etc.
Wouldn't that start home buying again?
DW
Posted by Noah
Mon Oct 27th, 2008 09:56 PM
there would be no money to be made by the central banking cartel
Posted by dw
Tue Oct 28th, 2008 12:27 AM
Think about it Noah, re. Gov't giving out steep discounted mtg rates.
Economy is already screwed up and housing is a disaster.
If Gov't. or Gov't. entity is giving 1-2% mtg loans for only a specified time (1 year) for people with stellar credit, steady job, 30-35% down, full disclosure. Add tight stipulations - can't sell for 3-5 years, etc.
...this is better then using our tax dollars for some IM bonus pool.
I'm just trying to figure out if this idea would hurt the economy in some negative way,...
Posted by MortgageMan
Tue Oct 28th, 2008 07:36 AM
DW:
I think that what you are trying to present, is basically a way to give people with an excellent financial scenario, a low rate mortgage with no revenue to the financial entity that provides it. From an investment standpoint, I don't think the bank or the government would consider anything like this.
From a credit risk perspective, I think its absolutely not feasible.
I mean think about it, anything in this world could happen. Look at Lehman. I'm sure there were people there making $300k/year who were working there for 10 years and now they are gone. Trust me, I think any financial entity securitizing mortgages will or has taken that into account.
Also if you take your scenario into effect, who do you think would pay for your mortgage, since it is not producing any revenue? I think the extra cost would be passed down to everyone else who doesn't have a 760 FICO score and a stellar financial profile. Not that its not happening right now via Risk Based Premiums, but the actual premium would be MUCH higher.
Highly doubtful that this would do any good to the current housing status, much less start it back up...
Posted by k91
Tue Oct 28th, 2008 11:27 AM
I am seeing no speak of MBS selling and how it is and will be the primary indicator of where mortgage rates should be headed . As I understand it the ten year treasury is not the indicator it once was. Am I wrong? As a person with two mortgages, I am very concerned with where rates are headed and am always striving to figure out how to get ahead of the ridiculously opaque market that is the mortgage market.
Posted by Noah
Tue Oct 28th, 2008 12:02 PM
K91 - yes, rates are based on mortgage bonds. But if 10YR goes from 3.75% to 6%, trust me, you will also see a rise in lending rates! Question is, where do we go from here?