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Banks Tightening on Prime and Subprime Mortgages
Although subprime adjustable rate mortgages are responsible for a disproportionate share of today’s foreclosures and for the losses that rattled the financial markets last summer, lenders are now tightening up on underwriting standards for all types
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Duncan | of mortgage loans, according to panelists at the NAHB Forecast Conference in Washington on April 24.
And while there are signs that the credit crunch for home buyers may be improving in high-cost markets — thanks largely to provisions in the economic stimulus bill passed in February temporarily increasing mortgage amount ceilings for Fannie Mae, Freddie Mac and the Federal Housing Administration — economists at the conference said that it will take time for investor confidence in mortgage-backed securities to be restored.
“Banks in every category of mortgage lending have now tightened standards,” said Doug Duncan, chief economist for Fannie Mae, including their requirements for prime ARMs. In last year’s fourth quarter, roughly half of all banks participating in the Federal Reserve Senior Loan Officer Survey reported that they had tightened on prime residential mortgages, compared to more than 70% on subprime lending and 80% on nontraditional loans.
Less than 5% of prime ARMS were delinquent for 90 days or longer in a Mortgage Bankers Association (MBA) survey for last year’s fourth quarter, Duncan said, compared to more than 40% of subprime ARMs. The share of prime fixed-rate loans during the quarter held fairly steady, in the range of less than 1%.
Accounting for 6% of loans outstanding, subprime ARMs were responsible for a 42% share of foreclosure starts in the last three months of last year, he said. Prime fixed-rate mortgages were 63% of loans and accounted for 17% of the foreclosures started in the fourth quarter, and prime ARMs were 15% of all outstanding loans and 20% of foreclosure starts.
Seven states in the fourth quarter accounted for almost half of all foreclosures though only about one-third of all outstanding loans, Duncan said. Constituting the hot markets where prices accelerated the fastest during the housing boom, California, Arizona, Florida and Nevada represented 24.7% of loans outstanding and 34.6% of foreclosures. States in the Midwest whose economies have been battered by a deep manufacturing slowdown — Ohio, Michigan and Indiana — had 8.6% of outstanding mortgages and were responsible for 11.9% of foreclosure starts, Duncan said.
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Nothaft |
| “If you have a good FICO score, can make a downpayment, qualify for full-documentation underwriting and it’s a conforming loan, it’s a great time to be in the market,” said Frank Nothaft, chief economist for Freddie Mac. “Otherwise, it’s more difficult to get credit and a lot more expensive.”
The spread between 30-year fixed jumbo and conforming mortgage rates is at a record high — at 134 basis points, he said. A normal spread between the two would be 25 to less than 50 basis points.
However, with Freddie Mac recently announcing that it has started to buy jumbo loans from big banks, Nothaft said that he has seen the spread start to narrow.
In the meantime, private-label mortgage backed securities for the subprime, Alt-A and jumbo loans that fueled the housing boom have become non-existent, he said. In March of 2007, they were being issued at a rate of $100 billion a month, or more than $1 trillion a year. In March 2007, a total of $191 billion in mortgage-backed securities were issued.
Fannie Mae and Freddie Mac now account for all mortgage loan securitization, with about $95 billion issued in March 2008.
The spread between commercial mortgage backed securities and 10-year Treasuries has also reached record high levels, Nothaft said, because of “a dearth of investors.”
“The price of credit risk has gone up substantially,” he said. But the cost will go down eventually “as liquidity is gradually restored to housing and market and investor confidence are restored.”
Slower sales and refinancings will result in a 16% drop in mortgage originations this year, Nothaft forecast.
 Want to Know the Housing Forecast for the Top 100 Metros?
Find out in HousingEconomic.com’s 2008 to 2009 Metro Forecast (free preview).
Get the metro forecast with in-depth analysis, overviews and downloadable Excel tables.
To learn more, visit www.HousingEconomics.com.
 Free NAHB Kit Gives Builders Back-to-Basics Tips to Navigate the Slowdown
What was once expected to be a relatively mild housing slump following three years of record new home construction and sales has given way to a significant downturn.
To help members navigate the uncharted waters of this slowdown, NAHB has compiled a comprehensive “Back to Basics” online toolkit — the best of the basics, the tried and true and the truly new. To access the toolkit, click here.
To access the “Back to Basics” toolkit, you must be an NAHB member and have a login to www.nahb.org. To create a login, go to www.nahb.org/login or click on the log-in button on the main menu bar.
For assistance, call the NAHB Member Service Center at 800-368-5242.
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