The mortgage industry has been experiencing very challenging times recently. Everyday you are hearing about mortgage companies going out of business or a company not being able to fund loans and many workers being laid off.
From 1999 to 2006, unprecedented home price appreciation and a very strong economy encouraged more creative mortgage products and a loosening of credit standards. Wall Street and the Capital Markets were happy to oblige our industry and invest in these loans as worldwide demand increased for assets with good returns. However, many investors were inexperienced in the U.S. mortgage market and were not aware of the risks that were involved. Late last year it became clear that performance of these loans were quickly deteriorating. Over the past several weeks that trend has worsened and many high profile hedge funds and investors have suffered staggering losses, resulting in a decrease of demand for investors to buy mortgage backed securities. This has left many mortgage companies with no one to fund or buy their loans.
The most recent example was the closing and bankruptcy filing of American Home Mortgage, the 10th largest mortgage company in the country in 2006. Therefore, with the capital markets not buying mortgages and American Home Mortgage not backed by a major United States bank, there was no place to borrow money from to lend to consumers, hence the only alternative was to stop originating loans.
Currently the financial markets are only interested in buying Fannie Mae & Freddie Mac loans. These are loans that are $417K and less and are underwritten to industry guidelines and backed by borrowers with average to above average credit history. There is currently not an appetite on Wall Street or the capital markets for the purchase of any other type of loans.
What does this mean for our local housing market? Fortunately we live in one of the most desirable places in the country with plenty of jobs and opportunities. The credit crunch that is now taking place will limit the pool of potential buyers and home prices will likely flatten or subside over the next 24 to 36 months.
There are still many loans nationwide that are heading towards default and foreclosure in the months ahead. However, in the long run the housing and the financial markets will recover as they traditionally always have. Eventually after this period of volatility and uncertainty, real estate will continue its 6 percent average annual appreciation rate as it has in the United States for the past 200 years.
Frank Fannon, IV, is a Senior Loan Officer, Branch Manager at SunTrust Mortgage, Inc., in Alexandria.