Market Overview: Subprime lending
By David Lereah
Senior Vice President and Chief Economist
NATIONAL ASSOCIATION OF REALTORS® March 16, 2007
Over the last few weeks, you've likely seen media coverage publicizing the poor performance of subprime and Alt-A mortgages (including hybrid ARMs-2/28s and 3/27s, payment option ARMs, interest-only mortgages, stated income underwriting, and 80/20 mortgages). These reports have covered efforts by federal regulators and Congress to develop new regulations and laws to prevent abusive subprime lending practices.
While some in the media have perhaps over-dramatized the situation, the basic facts presented have been accurate. A number of subprime lenders that made problematic loans have gone out of business. The delinquency rate for subprime loans is more than 13 percent and 4.5 percent are in foreclosure. Wall Street investors are now requiring better underwriting and increasing the pricing for subprime loans. Federal and state banking regulators have issued guidance to tighten the underwriting standards for nontraditional mortgages and recently proposed similar guidelines for subprime mortgages. Finally, Congress is holding hearings that may very well result in the development of new laws to protect consumers.
What you need to know as a REALTOR is that while all of these actions will affect the mortgage markets and, in turn, the real estate markets, NAR is working hard to be a part of the solution. In fact, REALTORS® can play a significant role in helping anxious homebuyers navigate the mortgage application process and become satisfied homeowners. We also support efforts to help homeowners avoid foreclosure and stay in their homes.
First, as a REALTOR, you should explain to your clients what's happening. The bottom line is that the poor performance of some subprime and Alt-A loans (particularly 80/20s -- no downpayment loans) has triggered stricter underwriting standards and higher costs. The new rules, accompanied by increased scrutiny by federal and state regulators, are causing some contraction within the mortgage markets that will limit the ability of some borrowers to qualify for a mortgage.
As a REALTOR, you should offer these borrowers information about conventional products like fixed rate and traditional ARMs that may be good choices for first-time homebuyers -- both prime and subprime. Responsible nontraditional mortgages and hybrid subprime mortgages may also be the right choice for borrowers who can afford them, now and in the future. In addition, FHA and VA have recently made significant improvements to their programs that can be valuable financing tools for many homebuyers. You should also be aware of lenders in your area offering these products. Finally, if you are associated with a full-service real estate firm, you should consider recommending to your clients the mortgage firm affiliated with your company. Many of them are experienced and knowledgeable conventional and government lenders.
Second, offer your clients NAR's brochures to help them understand their options. The NAR "Shopping for a Mortgage? Do Your Homework First" consumer education brochure series is perfect for homebuyers with less-than-perfect credit. The publications include "Specialty Mortgages, What are the Risk and Advantages?" and "Traditional Mortgages: Understanding Your Options." In addition, there are new brochures that (i) describe recent changes to the FHA program that can benefit your clients and (ii) help consumers avoid predatory lending. NAR issued the FHA brochure in partnership with the Federal Housing Administration of HUD and the others in partnership with the Center for Responsible Lending.
These consumer education brochures are designed to help a homebuyer make smart financing choices. They explain the pros and cons of conventional loans, such as fixed rate and adjustable rate mortgages; explain how to tap into existing home equity; and explain specialty (nontraditional) mortgages, including interest-only mortgages and payment option ARMs. Links to all of the brochures can be found in the Housing Opportunity section on Realtor.org. You can download them for free or order them from the REALTOR® Store.
In Washington, NAR is working to promote a safe and stable mortgage marketplace for future homebuyers and to minimize foreclosures. We are talking with all of the major real estate finance players and the regulatory agencies about the current market situation and possible ways that we can work together to address problems without causing significant disruption to families looking to purchase homes. We will continue to do so throughout the coming months.
In addition, NAR is conveying a strong message to the Congress about the importance of the Fannie Mae and Freddie Mac reform and FHA modernization bills. On March 12th, Tom Stevens, immediate past president of NAR, testified that the "GSEs' housing mission and the benefits that come with it play a vital role in the continued success of our nation's housing system." On March 15th, NAR testified at a Senate hearing on the FHA reform bill as well. NAR's REALTOR® witness, Joanne Poole, underscored the importance of FHA reform in expanding homeownership opportunities for many families, particularly lower income and minority borrowers. NAR is committed to making certain that both pieces of legislation maintain and strengthen the GSEs' and FHA's critical roles in the housing market.
While you should expect some continued volatility in the mortgage markets over the next several months, rest assured that NAR is working diligently to propose and pursue appropriate solutions, so future homebuyers can finance their homes with safe, fair, and affordable mortgages.
