The Sub-Prime Mortgage Fiasco - Part X

Good Day,

Since this month’s report contains mostly negative mortgage news, I will keep my analysis of the mortgage and real estate market fairly short.

In the past month, we have seen further deterioration of financial institutions balance sheets in the form of unexpected mortgage and credit related loss reserves, most importantly with Fannie Mae and Freddie Mac who purchase a majority of originated conforming loan size mortgages. The continued uncertainty and lack of stability in the credit markets has led to a limited appetite for mortgage backed securities, a lessened supply of credit facilities, increased risk aversion, and the need for Fannie Mae and Freddie Mac to increase their pricing to offset past losses – all of which contribute to higher interest rates.

And now the good news….

The FHA has really stepped to the fore by expanding their maximum loan amounts, while keeping required borrowers equity at 3%. Their credit score requirements are also a lot less severe than with traditional lenders, and fair to poor credit is not punished as severely. Of course as a tax payer it causes some concern to me.

At least in some geographic areas, the housing market is beginning to stabilize. For instance in the Boston Market prices actually increased moderately. In addition, June’s existing home sales increased 5% nationally. Hopefully this trend will continue and we will see the bottom of the housing market shortly. I believe that future foreclosure’s will be the driving factor in the housing market, as foreclosures both increases housing supply and drive down pricing as lender’s want to liquidate foreclosed upon houses as quickly as possible.

The psychology of the housing bust has affected most of us more than the reality. We all need a place to live, so the actual value of our homes while we are alive is almost irrelevant. It is mostly only our heirs who stand to loose if housing price have not rebounded by the time of our demise, and personally I plan to live along time.

Very few of us have should have been hurt by the decrease in home values. Those who have been effected are:
- Older home owners with plans on downsizing to a less expensive home;
- Those who own second homes or investment properties;
- Those who used their homes as a piggy bank and took out home equity lines to sustain a life style above their income levels;
- Those who purchased in the last couple of years and would like to move but owe more than their homes are worth, and do not have the excess assets to make up for their loss of equity.
- Those whose adjustable rate mortgages are at or near their adjustment dates, and can not refinance into a longer period loan due to lenders loan to value guidelines.

The rest of us actually benefit from lower housing prices as it makes housing affordable for first time home buyers, as well as for existing home buyers who want to move up to previously unaffordable neighborhoods. Vacation homes are now more affordable, and investment properties are now usually cash flow positive as a result of higher down payment requirements, and lower prices.

While we are all leery of increasing interest rates over the last several months, the drop in home values far exceeds the cost of higher borrowing.

As usual, I look forward to any thoughts and comments, as well as any referrals to friends, family, and co-workers. I would be happy to run numbers and prepare various analyses for you. If you are already working with a different Chase Loan Officer, please continue to give him or her your support.

Kind regards,

- Greg

Disclosure: The opinions expressed are my own and do not represent the positions, strategies or opinions of JPMorgan Chase.