The Real Estate, what lies ahead - 2007 and beyond : Bad Credit Advisor

The Real Estate, what lies ahead - 2007 and beyond

As someone said a very long time ago - I know what happened yesterday and I understand what's going on today, so I can pretty much figure out what will happen tomorrow. What I figured out is not going to win me any friends, but in my opinion, the whole real estate field will be shaken very badly. I base this statement on the following observations:

New much tougher sub prime mortgage qualifications
Argent Mortgage and Freemont have announced that in order to obtain a "No Money Down" mortgage, a potential home buyer must have a middle FICO score of 640. Two weeks ago, the minimum middle credit score was 580. Other sub prime lenders will undoubtedly follow. This whopping 60 points or 10% increase effectively leaves a sizable number of would be home buyers out on the cold. You have to understand that these "No Money Down" loans gave a huge boost to the real estate and mortgage industry.

If you have 5% to put down, your credit score can be as low as 560, Long Beach Mortgage will still gladly give you the loan, as long as you can afford interest rates well over 10% with such bad credit. I bet that there are not going to be too many willing to pay that much, and buyers will try to raise their scores first.

Record number of foreclosures
The homeowners loosing their homes to foreclosures or even the ones getting Notice of Default will be out of the home buying market for years. Currently you still can buy a house with a bankruptcy after 24 months providing you put 20% down payment in most cases. It may or may not get more strict, but the large number of newly foreclosed people will further limit the number of potential buyers.

Lenders having problems
Many sub prime lenders will lose the investors who buy loans from them. That's exactly what happened to the Mortgage Lenders Network which filed for Chapter 11 bankruptcy.

Another relatively new problem has arrived - Class Action lawsuits against the large banks by the consumers who argue that they were mislead into adjustable risky mortgage known as Option ARM. The case against Chevy Chase Bank may set a precedent, and it doesn't look good.

And what has already become routine - more earning warnings, this time from HSBC and New Century.

Finally, something happened that forced Washington Mutual start selling mortgages, mainly to Wells Fargo. I am talking about very prime conforming loans, which Washington Mutual used to buy from a number of smaller banks. I only know about this because 6 of my clients who have been with WaMu for many years, received letters informing them about the sale.

What made WaMu do it, in my opinion, are two problems - the first one is the urgent need to bail out its cash strapped sub prime subsidiary, Long Beach Mortgage.

The second one is even more severe. Roughly 4 years ago, WaMu opened up a huge number of retail outlets which were to provide a truly complete banking service. You can literally do everything inside those sleek modern banking centers, from paying your mortgage on the very last day, to opening a saving account. The problem is WaMu grossly overestimated the demand, opening way too many of these centers. While these outlets proved to be extremely convenient and well liked by consumers, I don't think they are economically sound.

So why is that so bad? Remember about the little guys who sold their loans to WaMu? They will suffer quite a bit, if WaMu hurts. There are still Wells Fargo, Countrywide and Bank Of America, which also buy mortgages, but WaMu has been a huge player in this field and its departure will be very noticeable for small mortgage originators.

At last, expect much tougher licensing for realtors, appraisers, mortgage brokers, and in particular underwriters - everyone involved into a home buying process.

With all that look for a further slowdown in housing market. And Real Estate has to get a bit more real ... in terms of prices as well.

Thu Feb 15, 2007 11:02PM by Tony | More in Economy | Comments (0)

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