Over the past two weeks, most Americans have not been able to keep up with the constant breaking news of changes in the financial world; the takeover of Fannie Mae and Freddie Mac, the failure of investment banks and bailouts by the government of private businesses.
I am often asked how so much money was available to so many unqualified people, and why was all this money being lent?
U.S. mortgages have always been a safe investment and investors from all around the world knew that they would get a good return on their investment in the U.S. mortgage market. Money continued to get pumped into Wall Street and the capital markets. There was so much money to lend and not enough qualified borrowers, which resulted in risky loan programs being created. The result of this was tremendous demand for home ownership and artificial price appreciation.
In early 2007, many of these loans started to become delinquent as people were getting behind on their mortgages. The banks and brokers began to realize that trouble was coming. Most mortgage companies stopped originating these risky loans in mid-2007, but it was too late.
The statistics have been staggering, resulting from many of the loans made between 2004 and 2007:
- 42 percent of stated income loans are delinquent (loans where you dont have to prove income)
- 150 mortgage companies a month are turning in their lending licenses
- 80 percent of Fannie Maes bad loans were originated in 2006 and 2007
- 35 percent of sales nationwide last month were foreclosures
- 7,000 foreclosures in Prince William County alone.
As we approach the 4th quarter of 2008, the lending rules are tightening every day. Fannie Maes mission is currently unclear as they move forward after being placed in conservatorship by the government. Fannie Mae had a conflicting mandate to maximize shareholder returns and pursue public missions. These two objectives were not able to coexist.
The 2009 Congress will help determine Fannie Maes new mission. Will it be to earn money? Keep people in their homes? Save the economy, or continue to provide programs so that everyone may become a homeowner?
As a consumer, one of the major changes you will see is a reduction in cash out loans. Currently, most banks will not give cash back greater than 80 percent of the homes value for mortgages or equity lines.
Additionally, only full documentation loans will be available. If you are self-employed and your tax returns dont show a lot of income, it will be tough to get credit. Borrowers with credit scores under 680 will pay premiums on their loans.
Ten percent down payment will become standard for conventional loans. FHA lending has increased tremendously in the past 12 months; three percent downpayments are required on these loans that are backed by the government. In 2007, five percent of loans originated nationwide were FHA loans.
In 2008, with the exodus of many risky lenders, FHA originations are now 36 percent of the marketplace.
Nationwide, home prices should continue to decline until mid-2009 and then begin to appreciate at a normal rate of three to five percent beginning in late 2010.
Each market place is different and we have been fortunate in Alexandria and Arlington not to have suffered the tremendous decreases in value like our neighbors in Prince William, Prince Georges and Loudoun Counties.
For qualified buyers, 2009 may result in the one of the best buying opportunities in the past 20 years.
Frank Fannon is Senior Loan Officer and Branch Manager for SunTrust Mortgage in Old Town