Wednesday, March 21, 2007

Tightening the Screws

From Inman News:

Problems in mortgage lending go "well beyond subprime," and the tightening of loan underwriting standards now underway is likely to push demand for homes down 15 percent and depress prices by 5 percent this year.

That's the rather gloomy forecast by analysts who follow the stocks of major home builders for Banc of America Securities LLC.
[T]he biggest problem facing housing markets may be the tightening of credit that's taking place as lenders put the brakes on risky loans including low-documentation and zero-down-payment mortgages, the report said.
Nearly half of loans awarded in 2006 with FICO scores of 680 or less and loan-to-value ratios of 98 percent or more had no or limited documentation, "which is worrisome to say the least," the report said.

"Overall, we expect that tighter lending standards will curb demand by 15 percent," BAS analysts concluded.
The problem of credit tightening will be especially acute in California, Nevada and Florida, the report predicted, because borrowers in those high-cost states were more dependent on loans requiring little or no down payment.

The report may even be underestimating the impacts of the tightening of credit under way, because it assumed lenders would still be willing to fund mortgages with 98 percent or higher loan-to-value ratios for borrowers with good credit. If all lenders stopped making zero- or near-zero-down loans altogether that could cut demand for housing by 22 percent.
BAS expects home prices to fall by 5 percent in 2007. Coming on the heels of a 2 percent price decline in 2006, the 7 percent cumulative price drop would be the largest decline in home prices since the early 1980s.

1 comment:

Diggin Deeper said...

With all the talk about subprime and Alt-A many fail to realize that prime borrowers will also be trapped in the resets taking place this year. ARMs, hybrids, and "pick you poison" loans were also lent to high FICO score borrowers. The problem most likely will not affect to the extent of subprime and Alt-A, but foreclosures and bankrupcies should rise above median standards due to poor risk management in the most creditworthy group of borrowers. If you add in the debt due to home equity lines of credit along with credit and consumer debt there could be some serious problems in the prime mortgage market that has yet to surface.