Swanepoel speaks out

RISMEDIA, August 13, 2007–The public media this past week headlined the apparent surprise “mortgage meltdown” as many reported the filing for bankruptcy protection by the nation’s 10th-largest residential financer; American Home Mortgage Investment Corp., Melville, New York. Real estate, contradictory to its glamorous profile a year or two ago, was again headlined but this time as the big bad wolf. So is this the end of the real estate mortgage Merry-Go-Round? Probably not, as I haven’t heard “a certain lady sing yet!”

So what’s happened? The sub-prime mortgage meltdown has spilled over into other areas of the residential mortgage market, including the jumbo market. For example Wells Fargo, one of the nation’s biggest mortgage lenders, recently raised the interest rates on it 30-year, fixed-rate, non-conforming jumbo loans to 8%. Overall the interest rates on these so-called jumbo loans have risen nearly 25 basis points in the past week, and are up nearly 100 basis points over the last 90 days. Concerns are even entering the commercial arena as increasing speculation among the hedge fund fraternity notes that the greatest risk may be for mortgages issued at inflated price levels in the commercial real estate market.

Ah, so what do we have today? A “Mortgage Meltdown” as the media, both in print and TV, has labeled the fiasco. This is largely based on the fact that market conditions in both the secondary mortgage market and the national real estate market have deteriorated to the point that many mortgage businesses are no longer viable or as profitable as before.

But then maybe they should never have been in business or should be penalized for not preparing for a shifting market. Only the foolish could really have believed that the “gravy train” was going to ride in perpetuity. Numerous prominent blogs warned about the bubble. Yes some were a bit over the top but many spoke the truth; we were forewarned. In the 2007 Swanepoel Trends Report published back in January dedicated an entire chapter to what it titled “The Bubble, Exotic Loans, Fraud and Declining Commissions have created The Hangover.”

But just like in the new CBS reality program “The Power of 10,” greed on the side of home owners, and of course mortgage brokers, lured millions of homeowners with the promise of irresistible low monthly payments and the illusion of owning the “American Dream” – whether they where qualified for it, or not.

So now, or soon, as millions of homeowners experience the clutches of the financial vice-grip tightening we have a market that is in a quandary. The result will most likely be a continuing rise in the number of delinquencies and foreclosures, particularly among low-income borrowers in conjunction with a declining housing market in many areas across the county.

With an estimated $130-billion in mortgages that have payments being reset this year, the adjustable-rate mortgage, once a solution, is now a ticking time bomb. These homes seemed affordable when house prices soared and home equity credit lines were the ticket to luxury cars, swimming pools and overseas trips.

But now the Pied Piper has come to collect. You can’t live in “Never-Never Land” forever. Borrowers are now getting a lesson in what the words “adjustable,” “deferred” and “balloon” really mean. The resulting ripple-down effect is placing even more pressure on declining property values.

However, what is surprising is that in those areas where housing prices have already stalled or fallen, many people appear to be truly flabbergasted and shocked; looking for someone to blame. Valid or not, Realtors as well as mortgage brokers may carry the proverbial “bulls-eye” on their back as many search for a scapegoat.

Realistically of course, house prices had to come down. It is simple economics 101 - supply and demand. If there are more sellers than buyers the market will be flooded with homes that simply won’t sell until prices drop and they become affordable again for the early phase speculators and opportunists.

According to Allen Fishbein, director of housing policy for the Consumer Federation of America, “What happened in a lot of expensive real estate markets is that first-time home buyers who felt they could not afford a home otherwise, took on a loan that had lower monthly payments than a traditional mortgage would have.” That means borrowers who can’t afford their payments can’t count on being able to sell their homes, while lack of price appreciation means many don’t have the equity in their homes they need to refinance at a good interest rate. Both factors make foreclosures more likely.

But maybe it’s not all that bad as the doomsayers say it is. According to the Mortgage Bankers Association, overall, 4.41 percent of mortgages are delinquent, up from 4.34 percent a year ago, but lower than they were three years ago. So, that means 96 percent of mortgages are being paid on time. That’s not too bad – we are still far from a real “Meltdown” as the media painted our industry this past week.

Good it’s not -but a meltdown it isn’t. Let’s just say we are in a much needed correction for a real estate and mortgage market. Markets that have been too strong for too long. At the same time, however, the market creates numerous opportunities to grow a business and gain market share. As with any trend or change, knowledge is the key and being pre-warned is also strategically smart. So never be caught off guard - make sure that you always read the latest edition of the Swanepoel TRENDS Report on the most important trends shaping the real estate industry. To get your copy of the 2007 edition (159-page Report or 90 minute DVD) visit www.RealEstateBooks.org Readers enjoy a special 10% discount as well as free shipping by using the promo code RIS2007.

RISMedia welcomes your questions and comments. Please send them to realestatemagazinefeedback@rismedia.com.