A couple of years ago, I said this to Maryland Real Estate Broker, Lenn Harley:
We agree on this subject that all are getting their just due,
I cautioned of the bloodbath [next year here]. I'm afraid that the fallout will be more than just a "blip" though. I'd appreciate your thoughts. Many homeowners got into these loans without income verification and extracted equity to pay their bills within the last two years.
The result could be extraordinarily tightened lending guidelines. A loss in liquidity is never a good thing for real estate markets
Posted by Brian Brady on 10/14/2006
Lenn's comment about my "crystal ball" led to my Real Estate Outlook for 2008 post. You can read the full text of it here but the salient points were:
- More not less of the foreclosure activity we saw these past 5-6 months will continue through 2008.
- The housing recession will extend to the American economy.
- There will be a marked class distinction that develops within the next 6-7 years.
- Housing prices will drop...more.
- Real estate agents and mortgage originators will flee the industry
- People will buy homes, they always do.
- Fundamental underwriting guidelines will reign supreme for the next 12-18 months.
- More home buyers will go online to start their home search.
I"m compiling my thoughts for the 2009 report and read some issues about lending. I one commented that we were headed "back to the future" in lending. I think the year 2000 will be a good benchmark for lending guidelines. In this article, a senior bank official agrees with me. The future is NOT completely bleak in lending but remarkably optimistic for people who can afford mortgages.
Is it difficult for a qualified buyer to get a mortgage today?
"It is not as difficult as people might imagine," Shield said. "Mortgage lenders are happy to make loans to qualified buyers who are interested in becoming long-term owners."
Today lenders are carefully evaluating three critical factors with regard to borrowers: their willingness to repay a loan, their ability to repay that loan and the value of the collateral, which is the house they are buying, Shield explained.
"All three of these important factors got left by the wayside to some degree over the past few years and that is why the industry ran into trouble," he added.
A borrower's willingness to repay loans is reflected in their credit score, which is the record of what they have repaid in the past. Also, because of the stated loan programs requiring no proof of income, borrowers' ability to pay was ignored. And it was assumed that the value of the collateral would continue to rise - which it didn't.
"And, unfortunately, for some people who got in too deep, foreclosure became the easy way out," Shield continued. "Even if they could continue to make their payments, when their house lost value and was no longer worth what they borrowed to purchase it, they just decided to let the bank take it back - even though it ruined their credit," he continued.
Take these comments from Mr. Shield to heart. If you need a primer read this.
