Growing Lender Problems are Going to Change the Market

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Topics: Financing

The slow market is going to make bank financing more scarce.  In terms of price reductions, I don't think single family houses, priced some where around the middle of the local market, haven't come down much in price. Nationally, even counting all those discounted condos and expensive houses that were bought on spec for fast resale, the average market price INCREASED by a percent or so in 2006; house and condo prices in the top 20% of the market are excluded, but the rest rose about 5%. That's not in the heady realm of the 20% price increases many people enjoyed, but it's a lot more than lenders were paying for cash deposits and CDs.

Speaking of lenders, they're the ones that are going to take the real beating as this market unfolds. Here's why: Very few builders and condo developers were building housing for Johnny Paycheck. Because of the combination of high land costs and low interest rates, they were reaching for the stars; building houses, which at best, there was only a slim market for. They were duped into believing that there was a lot of consumer demand because speculators who never had any intention of living in, or paying for, expensive homes put down minimum down payments on pre-construction contracts; then later refused to close on them.

The combination of slow sales and media announcements, that housing was crashing, drove speculators and investors out of the market, leaving only buyers who needed housing. Confronting desperate builders who were cutting prices on new homes and offering incentives, they slowed down their buying. This caused the housing stock to pile up which created even more uncertainty in the market.

When sales slowed, consumers who had financed expensive toys with equity lines of credit, borrowers with indexed mortgages and balloon payments coming due, speculators and builders with highly leveraged properties and high payments began to default on their loans This is the scenario confronting lenders today.

Many people don't realize it but mortgage lenders are the greatest speculators of them all in a rising market. They made loans with little regard to credit scores, down payments, and job stability to all comers. While owner/occupants struggle to keep their homes, the other borrowers are defaulting by the thousands.

At foreclosure sales, lenders are still setting minimum bids at the defaulted loan balance plus costs. Consequently, they are the only bidders; and their inventory of foreclosed homes is rising dramatically.

When this happens, you can be sure that they are reluctant to make any more chancy loans. Lenders are beginning to demand 5% to 10% down payments on new loans even from borrowers with higher FICO scores. Pause a moment and ask yourself how many houses you would have been able to sell over the past three years if the buyer had to pay 10% of the sale price in order to get a loan. About the only buyers with this kind of money were those that got it from the sale of a prior home. But if the banks hadn't lent their buyers mortgage money, they wouldn't have been able to buy their next house. We'll review the solution next time.

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