Magazine article Mortgage Banking

Welcome to the New Market

Magazine article Mortgage Banking

Welcome to the New Market

Article excerpt

FROM HOME BUILDERS AND MORTGAGE bankers to institutional investors and consumers, the housing industry has revitalized our economy and created new wealth. Worth $15.2 trillion, homes have become the most valuable investment for many Americans, according to Lyle E. Gramley, former Federal Reserve governor and a former chief economist for the Mortgage Bankers Association (MBA).

Housing remains a bulwark of our nation's economy. Yet, it is hard to believe that just one year ago, mortgage origination records were being set throughout America. Just look at the numbers. The market has gone from a high of $1.2 trillion in July 2003 to a forecast $388 billion for the first quarter of 2005. According to National Mortgage News, mortgage funding of $599.1 billion during the first quarter of 2004 was the weakest in seven quarters. Frank Nothaft, Freddie Mac's chief economist, predicts that cash-out refinancings will fall 48 percent this year, to a four-year low.

Now, all of us are focused on finding new business, growing market share and keeping our client base intact. "Traditional" lending has grown less important as we look for ways to provide mortgages to consumers who have more complex financial needs--from those with tarnished credit to the growing base of the self-employed. In our rush to attract new customers, there are some key points to remember. Caution and sound business practices must temper the urgency to maintain budgeted production volume.

To be successful in this new market and survive the transition to a more normalized lending environment, I believe there are three factors that must become priorities: accurate appraisals; disciplined, rational pricing of our products; and account executive and loan officer training. Otherwise, some questionable practices and costly mistakes will put many companies' reputations on the line and elevate their risk of failure. These cycles always claim the less efficient--those who do not pay attention to the fundamentals.

First, let's examine why accurate and conservative appraisals are so important, especially as we see a housing bubble looming on the horizon. A bubble forms when home values appreciate faster than actual values. The latest valuations for a number of areas do raise some red flags. The Federal Housing Finance Board reported that in the 30 markets where prices rose, 12 of those increases were in the double digits. Just look at Las Vegas, with a 37 percent increase, and Miami at 19 percent. The July 2004 median home price in San Diego escalated to $472,000, up 23.6 percent from one year ago. In San Diego, the time required to sell a home has gotten longer, creating some seller price concessions. This is dramatically different from one year ago, when buyers were paying a premium over the listing price to purchase a home successfully.


Many analysts consider these areas and others, such as Boston, Washington, D.C., and New York, to be overvalued. Buyers, however, do not seem to be worried about what direction home prices are headed. Instead, they are focused on appreciation as the stock market languishes.

The dilemma, often, is that appraisals are slow to respond to changes in market conditions. The real risk occurs when an appraiser values a house at the top of the market, justifies that sales price using a time adjustment, and then that is immediately followed by rising interest rates and a market slowdown. By all indications, this is now beginning to happen. Consequently, those unlucky borrowers who paid at the higher end of the spectrum a short time ago have really paid more than their home is actually worth. This generally leads to a loss of equity or, if a minimum-down-payment program was used, a negative equity position where the mortgage exceeds the value of the property.

This situation gets more complex as the real loan-to-value (LTV) that the investor holds may not be accurate because the correct amount of equity in the home is less than what was presented in the appraisal. …

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