Loan standards tighten

Spotty credit records are out, bigger down payments are in.

from the August 15, 2007 edition

Page 2 of 2

Page 1 | 2

The Federal Reserve has estimated that the total losses in the housing market during this downturn could come to $100 billion out of a total debt of $10 trillion, Duncan says. The worst hit states, he says, are California, Arizona, Nevada, New York, New Jersey, Maryland, and Florida.

"In other states, foreclosure rates have fallen," he notes. "It's the bigger states on the coast with the higher populations."

In the case of California, the majority of loans are jumbos. In addition, many borrowers signed up for adjustable-rate mortgages (ARMs) that included the option of interest-only payments or some minimum payment. Now, with home prices falling and interest rates being reset higher, delinquency rates and foreclosures are rising quickly in the state.

"California will be the big story for some time," says Duncan. "Housing prices will have to adjust."

Despite the looming losses, banks in the US are still making loans, Duncan is quick to add. But the volumes are down substantially. In fact, most of the loans now being made are mortgages that qualify for resale to Freddie Mac or Fannie Mae – quasi-government institutions that buy mortgages from banks to help provide liquidity. These are capped at $417,000.

Interest rates for 30-year fixed-rate mortgages have remained just more than 6 percent. However, for jumbo loans, interest rates have gone up as much as 1-1/2 percentage points, depending on the issuer. According to Bankrate.com, the national rate is now 6.96 percent, up from 6.7 percent last week for 30-year fixed-rate jumbo mortgages. Some lenders are even offering the larger loans at 8 percent.

But it's no longer just the interest rate that matters, say mortgage brokers. In Scottsdale, Ariz., Steve Walsh, president of Scout Mortgage, describes how he has lost 100 loans in the past few months because "viable candidates" could not get the appraised value for their loans. "Say they bought the house for $450,000, but it's appraised for $400,000," he explains. "Every sale seems to be about 20 percent below the market last year."

The falling prices, combined with higher mortgages rates, are turning some buyers into walkers. Mr. Walsh says he has two customers who found it made more sense to walk away from their $100,000 deposits on $1.5 million homes after the homes dropped $300,000 in appraised value. "I walked away from a $25,000 deposit on a $3 million house in North Scottsdale for the same reason," Walsh says.

The same is true in Florida, says Jack McCabe, CEO of McCabe Research & Consulting in Deerfield Beach, Fla. "Last year, over 50 percent of the mortgages made were volatile adjustable-rate mortgages," he says. "They were heavily used by speculators, and all income levels, and now with prices declining in Florida, we're seeing a large number of walkaway rates."

For example, in Fort Myers, the foreclosure rate is up 400 percent over a year ago, Mr. McCabe says. "We're really in a crisis right now," he says.

1 | Page 2