Mortgage woes create new lending realities
The mortgage meltdown and its aftermath probably will be felt for months, if not longer. But already it seems safe to make a few predictions about how the crisis will ultimately unfold:
More people will buy homes the old-fashioned way, by applying a down payment.
In 2005, the typical first-time home buyer put down just 2 percent, according to the National Association of Realtors. But with lending standards tightening, look for that figure to edge higher, even if most borrowers don't quite return to the old standard of 20 percent.
If there's one silver lining from the debacle, it's that more people will recognize that "debt" is a four-letter word.
Bank consolidation will continue, if not intensify.
This is an easy prediction to make, since the number of insured banking institutions has declined from more than 18,000 in the mid-1980s to fewer than 9,000 today, according to the Federal Deposit Insurance Corp.
This latest scare could push more customers into the hands of the big players, which tend to be companies with diversified revenue streams, deep financing reserves and transparent accounting.
Mortgage companies won't be paying out such fat CEO compensation deals.
As a timely example, Angelo Mozilo, founder and CEO of Countrywide Financial, generated nearly $142 million, including option exercises last year, placing seventh on Forbes magazine's executive-pay list.
That won't recur this year - not with Countrywide's stock cut nearly in half, its credit line tapped out and the firm requiring a $2 billion equity infusion from Bank of America.
The homeownership rate won't hit a new high for at least several more years.
In a visit to Phoenix three years ago, President Bush touted the nation's homeownership rate as a shining spot for the economy. It hit an all-time high of 69.2 percent that year. And he was right - it was an important indicator pointing to rising prosperity.
Unfortunately, the indicator already has started to move south, hitting 68.2 percent in this year's second quarter. With credit tightening, many renters will be blocked from buying.
Investors will recognize the bond market for the treacherous place it is.
Although the roots of this credit crunch certainly reflect housing weakness, bond-market investors allowed events to move to extreme levels.
If investors hadn't been so willing to gobble up mortgage-backed bond instruments on which they didn't fully understand the risks, a lot of the fallout could have been limited.
More mortgage customers will take the time to actually read their documents.
Buying a home is one of the most important money decisions most people ever make. Yet reading through all those papers makes translating the Dead Sea scrolls seem easy by comparison.
There's no reason home-loan papers can't be presented in a more concise, plain-English format. Hopefully, the confusion over negative-amortization ARMs and other exotic stuff will encourage the industry to come up with more understandable documents.
Hispanics and African-Americans will feel the impact from tighter credit more than Americans overall.
As it is, members of the two minority groups own homes at relatively low rates.
Plus, some evidence suggests they have lower credit scores, which puts them into riskier, higher-cost types of mortgages. And they appear to have less cash that can be used for down payments. For example, more than half of Hispanics and African-Americans reported less than $10,000 in total savings and investments in a survey by the Employee Benefit Research Institute. That compared with one-third of Americans overall.
Some of the lessons learned from this crisis will be forgotten in five or 10 years.
As long as there are cash-strapped buyers, there will be incentives to squeeze into homes that many people can't afford, encouraged by real-estate professionals more focused on maximizing their own incomes and keeping their firms' revenue streams on an upward trajectory.
Real estate is a cyclical business anyway, and it's a safe bet we'll see many of the same mistakes repeated down the road.
WBJ Web Partners
Most Recent
Most Recent
0 Comments