Concerns about the availability of financing for impaired-credit borrowers continued to roil the mortgage markets recently. Ironically, this may be good for some of us.
There are really two tiers of borrowers in the mortgage markets, “A” credit which includes about 80% of us with good credit and some resources, and what used to be called “hard-money” and is now referred to as the “sub-prime” market. Sub-prime is a sanitized term for loans to folks with lousy credit. In the bond world these are called “junk”.
Rising delinquencies and foreclosures are causing lenders to make fewer loans to minimize their exposure to these potential money losers. Although the fallout from tighter money could become wider ranging, right now, I am seeing mortgage pricing for good-credit applicants actually coming down, albeit very slightly, while sub prime rates are rising according to HSH Associates.
Faltering home prices are likely to blame for the growing number of bad loans and this tighter money environment may only weaken home prices further. Borrowers with little equity who face difficult economic times or rising monthly payments due to adjustable rate loans may have little chance to refinance their mortgages or sell their homes in hopes of making full repayment if the housing market is no longer producing any “instant equity” for them. There’s no easy way out, but as a last resort they can mail the keys back to their lender; this will certainly damage their credit rating, but if they were already sub-prime borrowers, there’s probably little to lose.
Will these woes expand, and will a spate of foreclosures put people on the street? Will we see a new glut of homes for sale in already saturated markets? I really don’t know. Lenders don’t really want to own real estate, and have powerful incentives to make things work with even seriously delinquent borrowers. From a lender’s standpoint, a partially-performing loan is better than a non-performing loan; foreclosure proceedings, acquisition, and disposition is a costly process, with no guarantees that even what’s due can be recovered from the sale. At least as potentially damaging is putting more housing inventory up for sale at a time when prices are already pressured, since that could depress the values of other homes in the bank’s portfolio, which would raise the risks of even good loans made to solid borrowers. Of course, bank regulators and Congress are peering over lenders’ shoulders, and a response which keeps people in their homes can serve to keep onerous new laws and guidelines at bay — not to mention the good public relations such moves can garner.
Offsetting this rationale is the fact that bankers own fewer mortgages these days compared to years past. Most loans are re-packaged and sold in blocks to investors. If those repackaging agreements say that after a certain number of days of delinquency foreclosure will be started, the trustees of these instruments may have little choice. I have never seen statistics on how the trillions of dollars of mortgages that have been resold stack up in this regard, but it will be interesting to watch this issue unfold.
How do you protect yourself when no one seems to know exactly how things will play out? Stay flexible, using only investments that can be quickly liquidated allowing you to adapt to changing markets. That is what I do for my managed account clients. Even if you don’t use my services, I strongly urge you to adopt this same basic strategy.
Stay tuned . . .