The credit crunch of August that inspired so much fear in the financial markets seems to be levelling off. The Dow has regained all of its substantial losses, consumer spending remains high, commercial construction spending is up and it appears the credit crunch has lost its bite.
Two trends that limited the number of qualified borrowers, a higher LIBOR rate (affecting subprime adjustable loans) and higher long term rates seem to have reversed themselves.
Speaking in London, former Fed Chair Alan Greenspan noted -
Similarly, the interbank lending rate, which jumped in recent weeks amid fears about insolvencies, has started to come down, but “not all the way,” Greenspan said Monday during a public talk in London to promote his new book.
Greenspan
also noted that subprime loans were not the problem, but the securitization of those loans helped cause the current lending situation. I submit it was the misuse of subprime loans by unscrupulous mortgage brokers that was a strong contributor to the problem.
Long before I got into the mortgage business, I remember a loan broker I knew saying, “people with bad credit deserve to pay extra to get a loan. After all, they put themselves in that situation and they don t have a lot of options.” That s great if you only want to do one loan with that client, but that s not my philosophy. Sadly, it is the philosophy of many who entered the business in the last few years.
If I have to put someone in a subprime loan, I give them the information and tools to refinance into a better FHA loan. If they follow that direction, they can eventually qualify for the best rates. In between, they ll also provide referrals. That sounds a lot better to me than trying to get the most amount of money I can from one loan. (Last I heard, this loan broker I quoted was working as a wholesale rep for a subprime lender. That company has subsequently gone out of business.)
The National Association of Realtors released numbers today showing the amount of pending home sales has dropped to the lowest rate since 9/11.
The National Association of Realtors pending home sales index fell to a record low of 85.5 from an upwardly revised 91.4 reading in July. That broke the previous low of 89.8 in September 2001, the period in which the terrorist attack shook buyer confidence. The trade group started the index in 2001.
At blame for this lower number in August was the mortgage crunch -
“Fewer contracts were being written because of mortgage availability issues, and a separate internal survey of our members shows more than 10 percent of sales contracts fell through at the last moment in August, primarily the result of canceled loan commitments,” said a statement from Lawrence Yun, senior economist for the group.
Higher jumbo loan rates in August had a huge impact, but fortunately those too have come down a bit. Overall, the mortgage landscape has improved. Lower interest rates across the board, increased consumer awareness of FHA loan programs and repricing of mortgage risk in the secondary markets have improved liquidity. The NAR s report added -
“The problem has since become less severe, though jumbo loan rates are still higher than they would be under normal conditions. Therefore, sales activity in late fall will better reflect market fundamentals.”
It will be a few weeks before actual sales volume and sales prices are made public on a national and local level. Expectations are not good, but July did see the first national median price gain in a year.
While the mortgage landscape has improved, it will be some time before we ll know for sure if this is a temporary blip or a genuine market shift. In the mean time, those who can take advantage of lower rates or FHA programs to refinance or purchase at fixed rates should strongly consider it.
