Tough Times Are Still Ahead for U.S. Home Market: John F. Wasik

By John F. Wasik

Aug. 27 (Bloomberg) -- If you think the worst is over for the U.S. home market, hold on to your hats.

The credit crunch is not only making mortgage financing tougher, it will force more homeowners into foreclosure. The surge of more bargain homes on the market will further depress prices. Along with a corresponding pinch on home equity, auto loans and credit cards, this pullback doesn't bode well for the economy.

The credit industry has become an inadvertent cheerleader for a recession. Consumers who can't borrow typically don't spend on items such as homes, cars and remodeling projects. It's a punishing economic boomerang of mass psychology.

Only those with above-average credit ratings will fare well in the purge of the riskiest kinds of mortgages from lender portfolios.

``It's been a bloodbath,'' says George Jenich, owner of Milwaukee-based Lender Rate Match LLC, which runs an online mortgage service. ``Since the beginning of the year, 25 lenders have been dropped from our database who have either gone bankrupt or stopped lending. We're down to 15 lenders now.''

Jenich said all but the largest lenders have curtailed or halted their offerings of the riskiest kinds of loans. That includes subprime, so-called Alt-A, stated income, no- documentation and 100 percent financing.

The Damage

The feeble state of the home market could become even worse as homeowners face higher property-tax and insurance bills in coming months.

Those who can barely afford mortgage payments are often forced to sell or are pushed into foreclosure. This is a pronounced problem in coastal markets where properties are most expensive and in areas where speculation ran rampant, such as Florida and Nevada .

Congress, market regulators and the Federal Reserve are trying to prevent a liquidity crisis that will cripple the already depressed home market.

Yet it may be too late to contain the collateral damage. At the end of last year, there were an estimated 7.5 million subprime mortgages totaling $1.4 trillion, according to the Center for Responsible Lending, a research organization in Durham, North Carolina. Some 20 percent to 30 percent of those loans may result in foreclosure. All told, the center predicts more than 2 million Americans will lose their homes. It may be more if the credit crunch continues unabated.

In July alone, foreclosures almost doubled compared with a year earlier, according to RealtyTrac Inc., the Irvine, California-based property tracking service. Hit hardest were those who were trying to refinance but couldn't obtain loans after their adjustable-rate payments rose.

More Money Down

Also hurt are those homeowners refinancing loans who have no equity or money down.

Jenich said lenders are most restrictive in Arizona , California , Florida , Georgia , Michigan , New Jersey , New York , Nevada and Ohio .

That means banks in those states will require more equity or cash and offer lower loan amounts. Not surprisingly, Nevada , Georgia and Michigan posted the highest foreclosure rates in the U.S. , with California and Florida showing the highest total foreclosures, RealtyTrac reported.

The trigger point for what industry experts say will be the next wave of foreclosures is November -- when the next resets are scheduled -- and then in April of next year.

``This will put borrowers in a straitjacket if they need to find 100 percent financing since no products will be available,'' says Jenich.

`More Stringent'

``There's the same flight to quality that drove Treasury- bill yields down to 3 percent,'' says Randy Johnson of lenders' reaction to the subprime blowup. He's a mortgage broker and analyst with the consumer lending Web site http://www.credit.com . ``It's going to get more stringent before it loosens up again.''

If you are looking for a mortgage for a second home, jumbo loan and have less-than-stellar credit, you will have to look long and hard.

As mortgage lenders duck risk like beachfront dwellers fleeing an approaching storm, these kinds of mortgages have become scarcer.

Lenders who got cold feet en masse after the subprime loan debacle -- mortgages granted to the most credit-challenged borrowers -- are even avoiding some loans for more affluent homebuyers. The risk-taking scare has resulted in curbs on jumbo or ``non-conforming'' loans for amounts of more than $417,000.

Need financing now? This is a good time to check your credit record and see if it's up-to-date. Any errors showing late payments or outstanding debts should be corrected. If there are any inaccuracies in your report, see http://www.myfico.com .

Check Your Credit

The highest credit scores will not only qualify you for a mortgage and other loans, it may enable the applicant to qualify for the lowest-possible rates. A rating above 700 on the FICO scale, an industry standard for measuring credit worthiness, generally will get you the best financing.

``There are fewer options for the credit challenged,'' says Gerri Detweiler, author of ``The Ultimate Credit Handbook.'' She notes that 10 or 20 points on your credit score could be ``the difference between getting or not getting a loan.''

The credit industry will eventually adjust to the new reality of tighter standards after the free-wheeling, no-money- down days that ended last year.

It's too late for regulating out of this morass, though Congress may be forced to compel secondary-market leaders like Freddie Mac and Fannie Mae to buy a wider range of mortgages and improve disclosure on loan contracts.

In the meantime, if you need a loan, you will need more savings in the bank and extensive documentation to prove income and assets. That was a safeguard all along. Why does it suddenly seem like a good idea to the industry and Washington ?