|
|
Mortgage-industry shakeout is really a return to normal
By Dan Seymour
The Associated Press
NEW YORK — While the disruption roiling the mortgage-financing industry
may seem like panic, some market veterans say it is actually a return to
normal after a period of excess.
Without trillions of dollars in easy money pouring into bonds backed by
mortgages in the last few years, many of the lenders going bankrupt this
year would never have thrived. And the U.S. consumer never would have
grown accustomed to a market where someone with a spotty credit history
and no verifiable income could borrow lavishly with little or no down
payment.
"There is a little bit of rationality returning to the markets," said
Richard Bookstaber, a former risk manager at a number of Wall Street
investment banks.
Bookstaber, author of "A Demon of Our Own Design," which argues crises
like this are inevitable because of the way markets are structured, said
this newfound aversion to risk — though painful — is ultimately good for
the economy.
That can be hard to explain, though, to the tens of thousands of people
who have lost their jobs at bankrupt lenders like New Century Financial
and American Home Mortgage.
Anyone who owned mortgage-lending stocks has lost a lot of money in the
past six months, and the shakeout in the industry prevents some people
from buying a home.
People and lenders had borrowed "to the hilt," Bookstaber said. It is
better for this industry to return to earth before it grows even bigger on
borrowed money, he said.
"It is better to fall off the ladder when you are just four rungs up than
when you are 20 rungs up," he said. "Every month that nothing goes wrong,
people think the market is all the less risky so they borrow more."
Flight to safety
Most of the credit problems that ignited this flight to safety sprouted
from "exotic" mortgages, including loans with cheap teaser rates that
reset higher in two years, loans that are not backed by enough collateral,
and loans where borrowers do not have to document their income.
These loans are becoming more difficult or sometimes impossible to obtain
as lenders become pickier about the risks they are willing to take. If
this shakeout seems drastic, consider that some of these loans were
practically nonexistent at the turn of the century.
The worst may be yet to come, though. Many adjustable-rate loans still
being paid at a teaser rate are scheduled to reset higher within the next
year.
Decaying credit
And Countrywide Financial, the nation's biggest home lender, has reported
decaying credit quality even among borrowers with prime credit quality. In
the meantime, standards are tightening.
"The industry has returned to what it was doing 10 years ago," said Frank
Bowersox, president of the Pennsylvania Association of Mortgage Brokers.
The permissive underwriting standards and exotic products of the past few
years "were directed at people who normally would not have been able to
buy a home," he said.
That means people with good credit who can verify their incomes still have
mortgage loans readily available to them, Bowersox said. In fact, interest
rates for prime home loans are at some of the most attractive levels in 20
years, he said.
Copyright © 2007 The Seattle Times Company
Saturday, August 11, 2007
Return to Real Estate News
|
|
