Recent additional declines in fixed mortgage rates have resulted in
a veritable flood of new mortgage applications with the majority designated
to refinance existing home loans.
One national index shows refi activity since Thanksgiving has risen
above the level last seen back in July 2005, and refinancing as a percentage
of total loan application volume rapidly has been approaching 60 percent
of the pie from what had been a figure closer to 40 percent as recently
as early September.
Typically, when refinance volume swells, it indicates consumers are
on to a good thing. Similar spikes in activity have occurred during
each major yield bottom in the mortgage rate cycle such as the one in
June 2003.
With the government's widely publicized plan to assist subprime adjustable
rate mortgage borrowers unlikely to help more than a tiny fraction of
such home owners, it's becoming clear the responsibility for exiting
ARMs will reside with each household.
Given the sheer volume of mortgage debt, it was never realistic to
expect significant government assistance. Simply look at the numbers.
Domestic residential real estate is estimated to be valued at roughly
$20 trillion with $12 trillion of mortgage financing in place.
This $12 trillion figure is within close proximity to the amount of
money generated by the U.S. economy on an annual basis.
Each year, the federal government only derives a bit more than $2
trillion of that sum in tax revenue. Therefore, the adjustable rate
mortgage issue is bigger than the government's ability to deal with
it directly. And that's why politicians are unable to deliver widespread
relief.
In short, Santa Claus is unlikely to pop down your chimney with a new
fixed-rate mortgage to replace your ARM. You'll have to do the heavy
lifting yourself.
Homeowners desperately trying to save their dwellings from foreclosure
in the subprime lending crisis say they are being led to a series of
wrong turns, dead ends and blind alleys as they seek relief from lenders.
“Sometimes it takes 45 minutes to an hour just to get to the right person”
on the phone, said Adeline Enriquez of the nonprofit Community HousingWorks.
Enriquez's job is to help financially strapped homeowners sort through
the red tape of easing adjustable-rate loan payments that are ratcheting
up. “You have to be very persistent and call again,” she said. “They
put on the music. They disconnect the phone call. I mean it is a mess.”
As defaults soar, President Bush and Gov. Arnold Schwarzenegger are
calling on lenders to put loan modifications on a fast track. Although
lenders say they are trying to keep up with the growing pleas for assistance,
changing the terms of a mortgage remains a frustrating and confusing
process.
While each day seems to bring more bad housing-related news, there
is still money available at reasonable rates to finance the purchase
of a home or refinance the loan on an existing home -- for the right
borrowers. Rather than exiting the market, lenders have simply retooled
their guidelines, turning their backs on riskier lending as they actively
court qualified buyers. "Banks still need to make loans if they want
to make money," said Steve Maizes, chief executive officer of the California
office of Olympia West Mortgage. The key is in the creditworthiness
of the borrower. "If you can prove income and have good credit, there
should be no problem for you," said Bob Barron, a mortgage planner in
the Solana Beach, Calif., office of Mortgage Loan Specialists Inc. "We're
just going back to sane underwriting. Prove that you make the money
to qualify for the house and pay your bills on time, and you will qualify
for the loan."
A group of three finance academics foresaw the looming U.S. subprime
mortgage crisis at least three years before the problems started to
become public early in 2007.
Go here
and you can find an as yet unpublished working paper entitled Default
risk in the U.S. mortgage market.
I talked to one of the report's three coauthors when he
was in Toronto in the fall for the Northern Finance Association conference.
Toby Daglish is a native of New Zealand and a professor
at the Victoria University of Wellington. Earlier in his academic career
he had stints in North American universities. His two coauthors –
Jon Garfinkel and Jarjisu Sa-Aadu – are both at the University
of Iowa.
When Daglish was in Iowa, he bought a house in Iowa
City late in 2004 and arranged a mortgage through a small regional bank.
"I was thinking I was going to have to pay mortgage insurance there
but the lady from the bank said oh we're having a promotion this month
and you don't have to buy mortgage insurance. I remember thinking that's
not a very sound way to run your business."
That was the genesis of the paper which continues
to be revised even as events overtake it. The paper used options analysis
to analyze the default risk of various house financing strategies. One
of the key findings is that the popular "zero down" floating-rate
interest-only mortgages can lead to situations where default is optimal
even after quite small declines in house prices.
The August 14, 2007 version of the paper [still the most
recent as of December] notes the explosion in housing starts and home
prices the last three years coincided with a dramatic loosening of credit
in the mortgage market. As lenders faced declining per-unit revenues
as mortgage rates dropped, many simply opted to make more mortgage loans.
As we now know all too well, the marginal borrowers approached by the
banks "is likely declining in quality." The paper also notes
the "secular rise in the percentage of mortgages written with zero
down payments."
Daglish et al wrote that as interest rates rose on variable rate
mortgages more borrowers would find them unaffordable, tempting many
to walk away from the mortgage. As they do so, the excess supply will
further depress housing prices.
We noted in this earlier
blog entry the hilarious British skit that explained the subprime
mortgage crisis as having its origins with a mortgage salesman approaching
an unemployed Alabama man in a "string vest" whose house was
about to fall down.