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Extent of Lending Pullback Damage for Housing Unclear
The ripple effects of recent problems in the subprime market could shave the downturn in housing production by an additional 10% to 15%, according to John V. Duca, a senior economist for the Federal Reserve Bank of Dallas.
However, “several questions remain unanswered about the ramifications of the pullback in nonprime lending — regarding home construction, foreclosures and home prices,” Duca said in a question and answer conversation appearing on the bank’s Web site.
“Unwinding the dramatic rise in nonprime mortgages could have a noticeable effect on home construction beyond what we’ve seen through the first quarter,” he said. “Some industry analysts speculate that the lending pullback could slow home building another 10% to 15%. At this point, though, it’s hard to gauge the full impact. With nonprime lending at nearly 40% last year, the effect could be even greater.”
For one thing, he said, it is difficult to forecast how much foreclosure rates could rise down the road because price trends have changed dramatically and a decline in documentation has added uncertainty about the debt service burdens of many nonprime borrowers.
Last year, subprime and Alt-A loans accounted for 40% of mortgage originations, he said, and many of those were made without the income documentation normally required to get a conforming loan. Alt-A mortgages go to buyers who don’t qualify for low-risk conforming loans because their credit score is too low, the payment-to-income ratio is too high or, in some cases, the income is not documented.
According to Credit Suisse, Duca said, subprime loans with low or no documentation rose from 30% in 2001 to 60% in 2006. On the Alt-A side, the share of those mortgages rose from 66% to 81%.
“Subprime mortgage problems are concentrated among borrowers who don’t have fixed-rate mortgages,” he said. “The vast majority of subprime loans have teaser interest rates. After two to three years, many reset at higher rates and borrowers in some cases also begin making principal payments. This resetting can trigger a dramatic rise in mortgage payments, which many borrowers are unprepared to make.”
Although flat or declining house price appreciation in most parts of the country has made it more difficult for subprime borrowers to tap into their home equity when they run into trouble repaying their loans, Duca indicated that a growing economy will provide at least a partial solution to the foreclosure problem.
“By keeping inflation under control,” he said, “the Fed hopes to sustain the current economic expansion, which should enable many, but not all, of today’s households and lenders to work through their mortgage quality problems.”
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Find out in HousingEconomic.com’s 2007-2008 Metro Forecast (free preview). Get the metro forecast with in-depth analysis, overviews and downloadable Excel tables.
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 NAHB Kit Gives Builders Back-to-Basics Tips in Cooling Market
With the current cooling of the nation’s housing market expected to persist into next year, NAHB has developed a comprehensive online toolkit geared to providing association members with information that will help them prosper in today’s changing business environment.
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