1/2/2009 1:19:00 AM Dollars & Sense: Part III Credit market back to basics: Smaller community lenders see little change in loans
VVN/Jon Pelletier
Mortgage broker Mark Miskiel points out that it’s not all bad news in the real estate market. Banks are lending money and houses are selling, it is just that normalcy has returned to lending standards and practices. Gone are the “liar loans” and “no doc” loans that required no income or credit checks. As well, Miskiel, along with others in the mortgage business, now offer loan modifications to homeowners needing to lower their payments.
To understand how the American economy got in its latest mess you need to do two things.
First, brush up on the principles espoused in Adam Smith's economic masterpiece "An Inquiry into the Nature and Causes of the Wealth of Nations," specifically the chapters on supply and demand and the "invisible hand" of the marketplace.
Then go back in time about 10 years.
Following years of overly optimistic investing in tech and Internet stocks, the U.S. stock markets nosedived in the late 1990s. To avoid a recession, the Federal Reserved dropped interest rates.
The lower interest rates made mortgages cheaper. Demand for houses rose. Because there was more demand than supply, the price of houses rose.
In an effort to purchase higher-priced homes, many buyers were drawn into mortgages they hadn't a prayer of paying for.
Many of these creative mortgages they were drawn into, now called subprime mortgages, were created over the last 30 years in answer to government pressure to help low-income borrowers to buy homes.
It can be argued that the U.S government invented the very tool of the economic collapse, the subprime mortgage.
By 2006, overleveraged homeowners began defaulting on their mortgage.
By 2007, banks and investment firms that had purchased large bundles of home mortgages, called mortgage-backed securities, discovered they were tainted with subprime loans, making them less than secure securities.
By 2008, the rising number of foreclosures began to drag down the price of all homes, taking good mortgages and the investors with them.
The resulting loss in equity collapsed the nation's and eventually the world's credit markets.
What's up?
But mortgage and interest rates are down once again -- way down. And, ask any lender, they will tell you there is plenty of money to be lent.
So what's up?
"There is a huge misconception that it is difficult to get loans. It's not true," says Mark Miskiel of Lighthouse Mortgage in Cottonwood. "What's different is that in the recent past all you needed to do to qualify for a loan was to be able to stand on two feet."
Miskiel says most lenders have returned to the old standbys -- conventional loans, FHA, VA, USDA Rural Housing and other government back notes, with 30-year, 15-year and adjustable rates, and zero to 10 percent minimum down.
Gone are the "liar loans" and "no doc" loans that required no income or credit checks. Gone also are the "pick-a-pay" and "deferred interest" loans, where the borrower paid what they felt they could afford (or not).
"For the most part, the market is back to the core basics. It is still easy money, just not as easy as before. It's cheap money. It's just not funny money," Miskiel says.
Miskiel warns there are likely more foreclosures on the horizon, in part because the loan market is too segmented to settle its own problems.
"Since most mortgages are now owned by more than one investor, it has been difficult for investors to agree to any restructuring of many bad loans," Miskiel says, "It is unlikely that will change in time to save many marginal mortgages."
Miskiel, along with and others in the mortgage business, now offer loan modifications to homeowners needing to lower their payments.
Starting in 2009, FHAs will lend up to $271,050 with a minimum of 3.5 percent down.
The rule of thumb still applies that your mortgage payment should not to exceed 36 to 38 percent of your gross income.
Consumer lending: Character counts
Ask most bankers and they you will tell little has changed in the last couple of years as far as their consumer lending (auto, home equity) practices.
According to Comer Wadzeck, vice president of National Bank of Arizona, the biggest change is that banks that once lent up to 90 or 100 percent of a home's values on a home equity loan have now backed down to 75-80 percent.
"I don't know of any banks that have had a significant shift in their consumer loan policy," Wadzeck says. "Income qualifications remain the same. What has changed is the loan-to-value ratio."
Lori Simmons of State Bank also says it's business as usual.
"We are lending as we always have. We prefer to lend to our customers because we know who they are. If a loan applicant comes in and is not banking with us, we have to ask why they are not borrowing from their bank. It's a red flag," Simmons says.
Good character and good credit scores, she says, are still the deciding factors.
"We still want someone to have a 640 or better credit score. They still need to prove their income. And we still need to make sure the collateral is sufficient to back the loan," Simmons says. "But character still counts.
"Good credit scores are a reflection of character, because people with good credit scores repay their obligations in spite of their circumstances. They find another job and do what it takes."
Simmons says her gut feeling is that the Verde Valley has not seen the bottom of the economic cycle.
"We believe unemployment will increase, which trickles down to every aspect of our community. We also believe foreclosures will increase through spring. It will be March or April before things begin to stabilize and people begin reinvesting," Simmons says.
