Eighteen months ago, no one had a clue the mortgage market was about to implode. G. Joe Smith, a mortgage consultant with ADS Funding Corp. in Gardiner, provided a whirlwind synopsis of what went wrong at a dinner hosted by the Southern Ulster County Chamber of Commerce on Jan. 22. The event was held at Would Restaurant in Highland and sponsored by chamber member Joseph Eriole, an attorney specializing in real estate, commercial business contracts, and land use planning and development at Veneziano & Associates.
Smith started out by surveying the carnage: in the fourth quarter of 2007, there was a $1.6 billion loss in profits at Washington Mutual, a 95 percent plummet in profits at Bank of America and a 98 percent plunge in profits at Wachovia. For the fiscal year, Merrill Lynch lost $10 billion and Citibank had $18 billion worth of write-offs. Smith said the S&P financials were down 21 percent at the end of 2007 from the year before, and the year saw slightly less than 200 bank failures, compared with 18 in 2006.
Smith said that according to the Mortgage Brokers Association, the delinquency rate on mortgages was 5.59 percent in the third quarter of 2007. Of the outstanding loans, 63 percent consist of prime fixed rate mortgages; 14.5 percent are prime adjustables; 6.3 percent are subprime fixed; 6.8 percent are subprime adjustable; and 9.3 percent are loans from the Federal Housing Administration. Of all the loans in foreclosure, 43 percent are subprime adjustables.
The highest foreclosure rates are in California, Florida, Ohio and Michigan, though for different reasons. In the Sun Belt states, a tremendous amount of construction helped spur a home-buyer push that resulted in an abundance of subprime adjustables. Those rates are now being adjusted to the higher amounts. In the Rust Belt states, massive layoffs are the culprit, with Ohio losing 200,000 jobs and Michigan losing 340,000 since 2001.
Smith said the national average unemployment rate as of December was 5 percent. New York state is below the average at 4.7 percent, and the three mid-Hudson counties are below the state average: 4.2 percent in Orange, 3.9 percent in Dutchess, and 4.3 percent in Ulster, although the numbers are increasing, Smith said.
Housing numbers
Meanwhile, the median sale prices of homes in the region have been decreasing. As tracked from November 2005 to November 2007, the decrease is 10 percent in Dutchess, 3.4 percent in Orange, and 1.6 percent in Ulster. These decreases are well below the average for the state, which is 18.9 percent, Smith said.
The number of houses sold has been dropping more precipitously, with a 30 percent drop in Dutchess, an 18.5 percent drop in Orange, and a 34 percent drop in Ulster. Statewide, the average drop in sales was 24.8 percent.
Smith said that when a bank makes a loan, it either puts the loan in its portfolio ”“ not a common practice ”“ or sells it to an investor. The investor in turn bundles the mortgage into what is called a mortgage-backed security and sells it to a hedge fund or large institutional investor, such as a pension fund. (Smith said in many cases it”™s hard to establish the value of those investments, since each investor sets its own rules.)
For five years, the strong economy and increasing appraisals enabled homeowners to pay off their loans, which caused the lenders to expand the marketplace and encourage more buyers into the market. But by the end of 2006, there was an uptick in foreclosures, followed by a flattening of appraisals in the beginning of 2007.
The agreement a lender signs with an investor requires the lender to buy back the loan if it”™s past due past 90 days. A subprime lender like Countrywide, which sold many of its loans to Merrill Lynch, didn”™t have any deposits to buy back its loans, so it had to pull down lines of credit. Meanwhile, the investors stopped buying its loans, and soon Countrywide was in trouble.
Smith said he deals with 30-some lenders. Two years ago “I could find financing for 90 percent of people who applied for a mortgage. Today it”™s 30 percent,” he said. “The flight to safety has gone to the other extreme. We”™ve lost some excellent products. Qualified buyers have a hard time buying a house.”
Feeling the pinch
The FHA products have become more restrictive in how they are underwritten. Smith said President Bush has been targeting exotic loans and encouraging people to refinance with the FHA. However, he said only 80,000 people have qualified, of which 30,000 have refinanced so far.
Smith said Congress is drafting legislation to try to streamline the process, as well as increase the restrictions on mortgages. Secretary of the Treasury Henry Paulson has announced he is negotiating with large lenders to freeze the subprime fixed rates for five years. However, the restrictions that apply mean this would only affect 10 percent of borrowers. Meanwhile, the situation is worsening: Smith said so far $150 billion worth of subprime mortgages have been reset at the higher rate, but another $300 billion in subprimes is scheduled for resetting in the next year and a half.
His advice to prospective home buyers: Build up your cash reserves and, clean up your credit.
Kathy Germain, director of home ownership at the Rural Ulster Preservation Co. (RUPCO), spoke briefly after Smith. She said RUPCO, which provides housing for low-income people, is getting five to seven calls a day from people having trouble paying off their mortgage, compared with one or two calls a week last April.
RUPCO provides counseling services to first-time home buyers. RUPCO advises people to budget no more than 30 percent of their income toward their housing. But she said that wasn”™t easy: the average median home sale price in Ulster County is $250,000. To qualify for assistance, RUPCO”™s clients must make no more than 80 percent of the median county income, which is $59,800 for a family of four. The maximum mortgage loan the person can afford at that salary would be $160,000, according to the 30 percent standard.
