SterlingResidential.com | Buying & Selling Residential Properties in Texas | Houses for Rent Houston Area | Humble Atascocita Kingwood & Spring Texas Realtors | Sterling Residential®, Realtors® | Real Estate Broker: Mortgage crisis rewind -- the signs were there in July 2005

Looking back at July 2005 provides a glimpse into what we knew about the pending mortgage crisis —- while some gave warnings , others carried on as though the boom would last indefinitely. Speculators moved from market to market seeking good deals to fuel their high-profit flips. Many lenders worked over every borrower for short-term gains with promises to refinance in the future before their innovative loan products became unaffordable. Back in July 2005, new mortgage brokers breaking into the business were trying to make a living — this post from the Broker Outpost Forum provides a glimpse into mortgage industry attitudes at the time — I’ve posted the entire excerpt (emphasis mine).

Hello out there, I am a new LO/Realtor & have a scenario that I need some advise on.. I have a client that is currently renting with a Fico Score of 652 & needs 100% Finance. We will have to go Stated cause this will be a combined income! He only has $8,000 to play with but can only afford a $1900 – $2200 MAximum Mortgage Payment. His plans are to live in the property for 2 years to build some equity & then sell & buy a better home. We got him approved for an 80/20. His quoted rate is 6.5% (5.9PAR) for the first & 9.5% for the second. The problem is that to stay within his payment desire he would have to find a home that’s roughly around 300k – 370K. He currently lives in Long Beach, CA & wants to stay close because he works on Call & has to respond within 15mins. The problem is that the only thing I can find him in that price range close enough to long beach is a few condos and even then tacking on the HOA fee will make that payment go up!! He is willing to get a condo but would prefer a house. My question is should I just offer him a pay Option Arm? His payments would be cheaper & probably could get a higher priced home & I know it would put him in a Neg Amortization but he would still be able to build equity & sell after 2 years… I heard there is only 95% Max LTV for option ARM in CA is that true? Any advise as to what route I should take Him that would offer 100% Finance but with low payments? Thanks – Last Post by: klee on 07/22/2005 @ 12:13:17 AM

While this lender worked to find an affordable loan for their customer — a loan they could afford at least through closing — news sources reported the first signs of a turning housing market. In the same month the above form post was recorded, the Sacramento Bee published this article indicating emerging signals that the California housing boom would end soon. A Sacramento real estate broker relates the current inventory growth and affect speculators were having on in his community in this article quotation.

One of the nearby “For Sale” signs is for an investor-owned rental home listed by Sergio Arreguin, a Keller Williams Realty agent. Arreguin said about one-quarter of the homes for sale in the neighborhood are owned by investors, including some who are his clients.

“They (investors selling homes there) were simply at a point where they felt the market was creeping up to its peak, per say, and they wanted to liquidate as much as they could and do it rather quickly,” Arreguin explained. He added that one of his investor clients planned to sell five homes in Natomas by year’s end.

Arreguin said some investors cashing out of Natomas are taking their money to Phoenix and other hot markets in Arizona, thinking there’s still plenty of room for prices to rise in those markets. Others are selling homes they bought new here a couple of years ago and are sinking their profits into older, less-expensive resale homes in the region to keep as rentals, he said.

If the capital region falls out of favor with too many investors at the same time it will undermine the market, analysts have long warned. For the past year, investors have accounted for a substantial portion of the demand for homes, buying roughly one of every five resale houses sold in Sacramento County. If too many decide now is the time to sell it will inflate the inventory and put downward pressure on prices.

Investors closed loans with little money down and no documentation — fueling the speculative markets that boomed in California, Florida, Nevada and Arizona. Prices rose as speculators competed with home buyers for properties. Eventually, people came to their senses as markets were priced beyond the average working family budget. Economic fundamentals couldn’t support the high housing prices in these locations and as we now know, prices came back down. Overheated markets cooled as speculators started dumping properties, leading to increased inventories and reduced prices even back in July 2005.

“Those who had been riding the upward wave decide now is the time to get out. Those who thought the increase would be forever find their illusion destroyed abruptly, and they, also, respond to the newly revealed reality by selling or trying to sell. And thus the rule, supported by the experience of centuries: the speculative episode always ends not with a whimper but with a bang.” John Kenneth Galbraith- A Short History of Financial Euphoria

Some of the conditions noted by Galbraith are cropping up in today’s real estate market. In one key speculative casino, Las Vegas, MLS listings which were 14,380 in April, and 17,005 in late May, hit 18,124 in early July. Price reductions have been running about 5% per week in that market, and that’s right at a time when a surge of new and very expensive high rise units is coming on stream.

Eventually, the media would catch on and news would filter out warning consumers about the housing market’s future down cycle. As the following July 2005 article from the Wall Street Journal indicates, despite early warning signs lenders continued to ease lending qualifications even for investor financing — a sure sign that things were getting out of hand.

But lenders are making it still easier for borrowers to qualify for a loan. They are lowering the credit scores needed to qualify for certain loans, increasing the debt loads borrowers can carry and easing the way for borrowers to get loans while providing little documentation. In some cases, lenders are easing standards not only for homeowners, but also for the growing number of people buying residential real estate as an investment.

The continuing loosening of lending standards has helped push the homeownership rate to a record 69% of U.S. households. Mortgage delinquencies, meanwhile, have remained low, with just 1.08% of residential mortgages in foreclosure proceedings at the end of the first quarter, down from 1.17% five years earlier, according to the Mortgage Bankers Association. Low interest rates and rising home prices have helped keep delinquencies down by keeping monthly payments in check and making it easy for borrowers who run into trouble to refinance or sell their homes at a profit.

Looking back, it’s apparent that some mortgage industry analysts looked only at existing foreclosure rates to gauge the industry’s health. Unfortunately, they failed to look ahead to determine how those marginally-qualified borrowers would afford their loans in the long term after the first ARM reset took effect. Yet, even as the mortgage industry held their breath and hoped for the best, Fed Chairman Alan Greenspan was looking ahead at the potential problems a frothy housing market and easy credit would create for consumers a couple of years later. The Wall Street Journal reported Mr. Greenspan’s comments from the May 2005 meetings — comments that predicted a mortgage industry jeopardized by poor-quality loans.

Still, some have speculated the Fed might use its regulatory sway over banks to tamp down the mortgage lending that is now fueling housing activity. In May, the Fed and other bank regulators warned lenders about interest-only home-equity loans, loans made with little or no documentation of the borrower’s credit-worthiness, and higher loan-to-value and debt-to-income ratios. Similar guidance on mortgage loans is expected.

But Mr. Greenspan said the guidance isn’t a form of bubble-pricking. “It was a response to indications that some banks were not appropriately managing risks in the home-equity area,” he wrote. The factors cited by regulators in May “have not necessarily had a material effect on housing prices. The possibility that home prices may be unsustainably high does, however, contribute to the risks associated with such lending, since it may suggest that the value of some loans’ collateral may be vulnerable to declines.”

Despite the early warnings, the markets boomed for much of the next two years. In the same month that Fed Chairman Alan Greenspan’s comments predicting future mortgage value risks, this report came from Nevada — reporting the red-hot record-breaking market.

Low mortgage rates, a robust economy and explosive population growth are fueling Southern Nevada’s red-hot housing market. There were 3,387 new home closings in June, a 29.7 percent increase from a year ago, reports SalesTraq, a residential research firm. There have been 17,255 new home sales for the first six months of 2005, or 3,390 more than last year’s record breaking figures.

“The number of new home closings for June was a record high, placing us on target to exceed 34,000 new home sales this year,” Bottfeld said. “By the end of the summer, the term ‘standing inventory’ may be a joke, except in the conversion market.”

Chairman Alan Greenspan’s comments were prescient — lenders are today struggling with mortgage security valuations, forcing several large banks to write down values on existing loan investments. Industry analysts indicate that the mortgage crisis will take some time to work through. While speculator’s weren’t attracted to Houston’s moderate home price appreciation — keeping us out of the boom-then-bust cycle — the local market is affected by the mortgage crisis as lender’s reduce their loan product offerings and increase qualifying requirements. Investors won’t find easy-credit financing any time soon, as low or no-doc loan offerings have evaporated along with low or no down payment loans. As local borrower’s contend with resetting ARM rates well into 2008, foreclosures are likely to rise beyond today’s record numbers, with further affects on Houston’s housing yet to be determined. And it was all so predictable.