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The Mortgage Crunch...How it will affect your business and what to do next
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Introduction and Background:
We are in the midst of a mortgage storm. OK...lets be honest. It's a storm of epic proportions. An increase in defaulting homeowners, mortgage companies losing their warehouse lending lines, and a general downturn in the housing sector has led to the closing of many mortgage companies in the past few months.
Two popular loan types of the past decade have been Sub prime and Alt-A loans. The term sub-prime is self-explanatory. Basically, anyone with a beating heart and the willingness to pay obscene interest rates on a home loan would be granted a loan. Alt-A is a term that refers to loan granted to borrowers who generally have decent credit, but who have little documentation to back up their income, etc...
Within the last few months, we have seen a massive, if not almost complete elimination of Alt-A and sub prime lending. And to make matters worse, one must realize that, all told, more that 60-70% of the loans originated in the past few years were loans of these types. Why?
Well, a large number of the homes purchased in the last five years were purchased by folks who had bad credit, or who were first time buyers with little to no credit history. So, due to the lack of sub prime loans available and tightening credit restrictions, we can certainly expect home sales to decline for some time.
But, unfortunately for Real Estate agents everywhere, the fallout is not limited to Mortgage companies. Anyone and everyone involved in any part of the Real Estate industry is being affected.
Massive companies like First Magnus and American Home Mortgage have closed their doors for good. Other lenders, such as National City have reduced or eliminated their sub prime and Alt-A lending divisions. Basically, any lender who did not have deep and strong ties to the folks on Wall Street stood the chance of losing their ability to sell their loans. You see, very few lenders originate AND service mortgage loans nowadays. Most originators sell their loans to much larger institutions. The rub? Well, those institutions are not willing to pay nearly as much for these loans any longer, if they are willing to purchase them at all. If you can't sell your loans, you are in a heap of trouble.
Cause and Effect:
Once the easy money drained out of the mortgage industry, we saw a massive slowdown in Real Estate sales. Year over year home prices are now declining for the first time ever. This was caused by speculators who purchased homes on the premise that prices would continue to climb indefinitely. In some markets, like San Diego and Las Vegas, prices are now dropping significantly. This is, of course, scaring home buyers away and making sellers very nervous. It's quite difficult to swallow the fact that the home you purchased for $300,000 last year is now only worth $280,000.
Where do we go from here?
We recommend that you advise your clients to take a long-term outlook. If they wish to sell today, they will lose a bit. However, most people won't simply turn into renters. They will need to purchase another home. If, and when they do, they will likely get their new home at a slight discount due to the stagnant market. Over time, their new home will increase in value, and they will still be ahead of where they started.
And, owning a home is still a huge tax advantage, and has many other fringe benefits.
Tell your clients to be realistic about their asking price, and optimistic that this downturn will not last forever. People still need to buy homes. Jobs require moves, investors are still buying, and people are still living a better standard of living today than at most other times in American history. We will look back on this downturn much the way we did the shockingly high interest rates of the early 1980s. It was a tough time in Real Estate, but it passed, and we all went on to prosper.
And the good news is...
1.) Not all borrowers are being affected. Typical A-paper borrowers should encounter very little resistance in obtaining a quality home loan with reasonable rates.
2.) Some stated income programs are still available.
3.) New government programs, such as FHASecure will ensure the mortgage crisis does not enter a new, more dramatic phase. It won't completely stop the madness, but it should keep it from spreading into a complete meltdown.
Specific Steps You Need to Take in Your Business Now:
* Get all of your buyers AND sellers pre-approved. There is no reason to waste valuable time working with buyers who put offers on a home, only to have the deal blow up 3-4 weeks later!! And for the seller, who waits to purchase their next home until after their current home is sold, let’s hope they can even qualify under today's stringent guidelines. Better get pre-approved and be safe rather than sorry!
* Sellers need to get realistic about their asking price, and FAST! We already know prices are expected to drop significantly in the next 6-12 months. If they take a small hit now, they can save themselves a massive loss in the months ahead.
* Sellers AND buyers need to check their FICO scores and start working on their credit immediately. Small changes to a credit report can mean big gains on FICO numbers. We have seen that as many as 50% of borrowers have at least one piece of incorrect information on their credit report. Why let something like this ruin their chances?
* Get aligned with a good, solid lender who has the ability to work difficult deals and provide solid pre-approvals you can count on. This is not the time to be referring five lenders to your clients. You need to build strong, strategic partnerships with companies who have the experience and product line to accommodate your clients.
How to benefit from this downturn
Yes, it is possible to actually prosper during this downturn. Sure, you can expect fewer deals to close in the near future. However, here are some positive thoughts to keep you motivated:
1.) Because of the stagnant market, many originators and Real Estate agents are leaving the business altogether. This has a few benefits. First off: Less competition for those of us who choose to persevere. Second, there are less people farming your neighborhoods. This gives you a greater opportunity than ever to get traction and create brand-name awareness with your intended target market.
2.) More time to work on our businesses rather than in our businesses. We all know that this crisis won’t last forever, and when the madness subsides, you can profit big. If you stay in this for the long haul, and don't give up, you will be on the leading edge once a turnaround occurs.
3.) Buyers are taking longer than ever to purchase. They are spending a lot of time researching their options. If you position yourself properly and educate these folks, you could put a lot of buyers in your pipeline.
Don't lose sight of the goals and dreams that got you into the Real Estate business to begin with. For every Agent who goes out of business this year, there will be another who survives and goes onto greatness. You can be that Agent. It won't be easy, but as John F. Kennedy was once quoted as saying, "We choose to do these things, not because they are easy, but because they are hard."
Are you a winner? Are you a fighter? If so, now is your time to shine.
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