2006 December

This year has been a roller coaster ride for the mortgage and housing markets. Early predictions were for a drastic increase in mortgage rates and a bursting of the housing price “bubble”. To a certain extent these predictions came true, but as the year closes out, both mortgage and housing markets are regaining some of their lost steam. Locally, in NC, we felt little or no effect of a “bursting bubble” as property values continued to rise throughout the year. NC actually saw a major invasion from homebuyers who were fleeing the areas that were experiencing the “bubble”, and these buyers have been willing to pay top dollar for homes in NC because they are accustom to doing so in their previous markets- CA, NY, FL.

Predictions of an expansion and recovery in the US economy was a major factor in the increase in mortgage rates for Conventional Loans, while early delinquencies and post-foreclosure sale losses by investor drove up rates for many Sub-prime Loans. As the US economy did not respond as predicted through the year conventional mortgage rates settled back down to market-driven levels as investors gained confidence that bonds (which back conforming loans) were a much safer investment than the stock market. The sub-prime market had to reap what was sown during the recent mortgage boom. Over the years, sub-prime lending rules had become much less restrictive as Wall Street had an insatiable appetite for non-traditional loans- this was fuel largely again by the dramatic increase in home values in many major markets, and the US populations us of home equity to carry them through the slow economic times. Wall Street investors were willing to accept the losses due to foreclosure simply because their were very few actual losses in a market where values were increasing 15-20% every year. However, as values stalled and in some cases dropped, and at the same time delinquencies increased due to poor homebuyer education and adjustments to interest rates, the losses to investors sky-rocketed. To feed Wall Street’s appetite, mortgages were all but “given away”- Home-buyers had little or no cash invested in the home and had long histories of poor credit and cash-flow management; it was inevitable that they would be delinquent on a mortgage that greatly increased their monthly debt-load.

As we close out the year, we see conforming loan qualifying rules tightened in some areas, yet expanded in others, as lenders work to mitigate losses due to a slower rate or appreciation, but at the same develop new options for the world we live in with the addition of 40-yr term loans and expanded options for interest only loans. Rates are still at very low levels, and will likely remain so until the economy makes a major turn around. The sub-prime loan market, on the other hand, is in the middle of a major shake up, as many large sub-prime lenders are closing their doors and others are rushing to find different lending options in order to generate revenue. Sub-prime lending rules will see a dramatic tightening in the next 6-months in response to the huge losses incurred by Wall Street investors. This will limit the available credit sources to many lower income households, but may ultimately be a much needed answer to the on-going ethical issue of “Do you give someone a mortgage just because they can qualify for the mortgage?” In the end, 2006 had many ups and downs, but as a whole was a prosperous year for most homeowners, homebuyers, and companies associated with the housing market- and just as in past years, the housing market has continued to carry the US economy and prevent a major recession.

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