As Realtors and sales professionals I feel its important that you be aware of a number of recent changes in the Mortgage Industry that will undoubtedly have a profound affect on all of our business.

What's the problem?  Bad loans!
The problem has arisen from the incredible proliferation of "new" mortgage products that have "helped" buyers get properties.  It has opened the door to MANY buyers who just 5 or 6 years ago would have never been able to buy a home … namely people with poor credit, low (or no) down payments, people who can not document income or assets, etc.   The industry seemed to be "caught by surprise" when customers who put zero down, had very poor credit and undocumentable (maybe non-existent) income began to default.

The current "non-prime" mortgages are expected to be the worst performing product in history with an estimated 20 - 40% of the loans originated in the past 2 years ending in foreclosure.

Other products that seem to be "heading South" at an alarming rate are "low / no down" buyers and especially those with undocumented income.  In 1990 over 96% of buyers put at least 10% down.  Those with undocumentable income generally put 20% or more down.  In 2006 about 40% of buyers put less than 10% down and move than 60% of those had undocumented income.

On top of all this the Adjustable Rate Mortgage has come into "vogue" and even more amazing is the wide use and acceptance of the "Payment Option ARM" that allows for "negative amortization" (each month you pay your minimum payment you end up owing MORE than you did the month before).  Loan officers pushed this product aggressively as they were compensated heavily by lenders and were paid incredible amounts when they pushed their customer into prepayment penalties that will make refinancing near impossible.

All of the above factors have increased (substantially) the number of foreclosures and delinquencies.  Now banks and investors that purchase mortgages from mortgage companies and hold them in portfolio are requiring the mortgage companies to "re-purchase" the bad loans they wrote and are demanding higher compensation (higher rates) for the added risk of default on new loans.

Which companies are feeling the pain?
All mortgage companies are suffering from a "liquidity crunch" that makes it harder to sell loans that they originate.  The ones that are most affected are the "non-depositories" (not banks) who rely almost entirely on mortgages for their earnings and who don't have the ability to hold mortgages as investments until market conditions improve.

Over the past 60 - 75 days 41 large, national players have closed or been acquired at discount (see http://ml-implode.com/).  Among them New Century who just last year was the 6th largest mortgage lender in the nation.  Countless smaller companies are failing daily.  These are generally "under capitalized" companies that must sell their originations quickly in order have sufficient money to continue operating as a lender.

Countrywide, one of the top 3 mortgage lenders, announced that they have discontinued 100% financing.  Nearly every "sub-prime" lender has announced within the past 3 weeks that they have discontinued 100% financing to people with less-than-perfect credit.  Most require 10% or more down for customers who can document income and as much as 40% down for those with undocumentable income.

How does it affect you and I?
Most of these lenders have left a trail of unhappy buyers, sellers, Realtors and Mortgage Brokers as they have simply closed the doors and walked away.  There are literally THOUSANDS of closings that have happened where the wires were never sent and the transaction never funded.  The problem again is highly concentrated among non-depository (non-bank) mortgage companies.

As we move through what will surely be even more cloudy waters in the coming weeks and months its important for you as Realtors to know that:

1.      It will be virtually impossible for customers with poor credit to buy with zero down payment or less than 20% down if they are unable to document income. 

Be suspicious of any 100% financing deals.  If someone brings you a contract with little or now down payment you may want to consider shortening the loan commitment deadline to 10 - 15 days (perfectly reasonable in today's market to get a commitment in 10 days or less) to avoid a lot of time "off the market".

2.      We will all experience some duress on "domino closings" (buyer A needs to sell to buyer B before closing and buyer B needs to sell to buyer C before closing).

Consider "bridge loans" for customers who have unsold homes.  Help your buyers and sellers understand the risks in "domino closings".

3.      As lenders recognize that over 87% of the foreclosures are coming through "wholesale" channels they will (already have) tighten guidelines CONSIDERABLY for loans originated by mortgage brokers (individuals who do not work for a lender / bank). 

Don't let the mortgage broker insist on prolonged commitment periods (over 15 days).  Either it’s a deal or it's not.  If they need to "buy time" be suspicious - possibly require higher escrow deposits and forfeiture clauses when timelines are missed.

4.      For those of you who have a following of "investors" start to preposition them to take advantage of foreclosures … its been a long time since we've been in a foreclosure market!  There will be deals! 

5.      National City Mortgage is owned and operated by National City Bank (the 8th largest bank nationally).  We are not required to sell our loans to other banks / institutions immediately upon closing.  We have (thus far) seen little affect on our book of business and continue to offer stated income, 100% financing and affordable housing products.

Bottom line

This is "Darwinism" at its best!  Its not the end of the world but a welcome and much needed weeding of the garden.  Mortgage money will still be available but perhaps the reckless "sign and drive" mortgages of just last month may be gone forever.  Expect changes and help your customers understand that many buyers who may have been able to afford a property just a few months ago may be prospective renters now while they save for down payments and work on their credit.  Its not the end of the world … just a game to see who can survive!

Please feel free to call me with any questions / concerns.  I am here to help you and your clients close deals and get a loan that is good for them!  I look forward to continuing to work with each of you.

Robert P. Ward
East Florida Area Manager
National City Mortgage, a division of National City Bank
5580 NE 4th Court, suite 4A
Miami, FL 33137
(305) 751-1081 Office
(305) 458-2092 Cell
(305) 751-1124 Fax
Robert.Ward@ncmc.com
www.ncmc.com/robertward Apply online and save!