Mortgage news this week was just one more blow for the housing industry. The Wall Street Journal reported yesterday that home-mortgage lenders are pulling in their horns on a substantial portion of mortgage options and raising interest rates on other surviving loan product.
The higher mortgage rates are not tied to the cost of money; the Feds have not raised rates. Lenders have hiked interest rates to make their loans more attractive in order to move them in the secondary market. Increased mortgage defaults have wreaked havoc on the value of mortgage-backed securities (as in Bear Stearns “extreme credit storm”) and investors just aren’t buying what they consider to be fraught with undisclosed credit risks.
American Home Mortgage stopped making loans early this week and slashed their work force by 90% disbanding 6,250 people. Countrywide this week issued a strong statement of financial stability which had only a midly soothing effect on mortgage jitters.
Investors are steering clear so in order to sell their loans lenders are going back to the basics, returning to more conservative lending practices of a decade ago, before the housing boom. And they are also adding the value of a higher interest rate as a carrot to investors.
As a result of secondary market demands, the subprime loans are expected to decrease by 50% this year. Lenders are also being forced to stop, or drastically cut back, on what is called Alt-A loans - loans that fall between prime and subprime and usually have some form of no-verification or no down payment.
Investors are pressuring lenders to require more stringent underwriting. Unlike with the subprime and Alt-A loans, this means most buyers/borrowers now must have NOT ONLY money for a down payment, BUT ALSO good credit, AND substantiated income to demonstrate ability to repay the loan.
The further pressure on the housing industry is obvious and seriously sobering. Higher monthly payments, fewer loan products, stricter underwriting, it all boils down to fewer borrowers and fewer house sales for the foreseeable future.
I no longer know how to spell RELIEF.
Hear John Lonski, Chief Economist at Moody's on unemployment figures, credit tightening, and housing worries.