The Mortgage Saga and What to Expect

Implications: Tightening lending requirements of remaining players and higher home loan rates will push the housing demand lower, adding further downward pressure to home prices and increasing the likelihood of Fed intervention.

Analysis:

Financing options thinned further for potential home buyers. Yesterday, American Home Mortgage Investment Corporation (the 10^th largest U.S. home lender) sent 6,300 of its 7,000 employees home when it filed for bankruptcy, and two other lenders announced they would stop funding new loans. American Home Mortgage, as pointed out in the article, is one of more than 50 lenders in 2007 to file bankruptcy.

American Home Mortgage was unique, though, from most of the other 50 lenders that have filed in 2007. The lender financed few subprime loans, instead focusing on Alt-A loans, which have typically been considered more stable because borrowers’ credit scores are of higher quality than those utilizing subprime loans. Lenders rely on the credit score rather than documentation, charging a slight premium (up to a half point) over prime loans due to the lack of documentation provided by the borrower.

What can we expect with fewer lenders offering home loans? Fewer potential buyers can qualify for a home loan today versus 6 months ago. According the one source, Goldman Sachs, 10% to 15% fewer buyers can now qualify compared with one year ago. Further downward pressure will be put on home prices. Buyers have only so much money to pay monthly for a place to live; with more money going towards interest, less can be spent on the price of the house. The odds of the Federal Reserve stepping in to affect the direction of lending and the housing markets increase daily. Inflation talk and rising Fed Rates will take a back seat to discussions on how to stabilize the market. Declining rates seem to be a real possibility in the near future, and further intervention may be necessary.

Builders and builder-lenders considering new projects would be wise to underwrite new projects conservatively. Demand for new homes will be affected largely by what financing options are available and at what price those options come at through 2007 and into 2008.