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Mortgage Patterns: Beating Values, Going Conventional, Government Gets Busy

There has been a lot of change and turmoil in the mortgage arena as of late: Subprime problems, rising mortgage rates, credit tightening and so on are the things that many of us are acutely aware of. Never in my experience has so much discussion been placed on the topic of mortgages. The orientation about a formerly overheated housing market has shifted front and center to mortgages. As a result, the topic is being analyzed, dissected and over-interpreted just the way the housing market was.

Here are a few mortgage topicss and their interplay with a weak housing market. Additional topic ideas are welcome.

According to David Berson of Fannie Mae, there is growing trend toward government backed mortgages [1] like FHA and VA loans.

Borrowers with blemished credit histories (who previously might have taken out conventional subprime loans) are likely now turning to FHA loans to purchase a home or to refinance their existing mortgages.

While the idea that the US government is gaining more exposure to residential mortgages after being asleep at the switch as the subprime mortgage mess developed is offensive to many, its not like the government is lending the money directly (unless I am missing something, so please enlighten me if I am). Here’s some message board feedback addressing the irony [2] (via bankrate.com [3])

Of course, having lived through the S&L crisis filled with acronyms like FDIC and RTC, I know that government has a weak track record of oversight when it comes to mortgages.

In addition, conventional mortgages are getting “fixed”…

The market share of adjustable rate mortgages have dropped considerably as mortgage rates trend upward (albeit modestly). According to the Mortgage Banker’s Association [4], the market share of ARM’s to Fixed Rate mortgages have dropped from 31% to 20% over the past 18 months. The drop is attributed to the decline in the number of investors and weakening sales prices. Regulatory pressures will also keep the number of new ARM mortgage products down, like no-doc (liar) loans and negative-ams (negative amortization). This will filter out a large swath of potential buyers including a large swath of first time buyers making the shift from rental to owner occupancy.

A self-serving (for me, since I am a co-owner of an appraisal firm) strategy that comes into play with values slipping in many markets is playing with the timing of the appraisal. In Bob Tedeschi’s always interesting (despite the column name) Mortgages column, his recent article Could Be Time for an Appraisal [5], addresses the issue of slipping markets and timing the appraisal.

“If you’re not selling, you’re typically fine,” said Bob Moulton, the president of the Americana Mortgage Group, a brokerage in Manhasset, N.Y.

But, Mr. Moulton said, there are exceptions. “As house values drop,” he said, “people can have a tougher time refinancing, because the house won’t appraise for the amount they might need.”

I am a little fuzzy (and squeamish) on the comment made about “not selling” but otherwise, this concept banks (sorry) on the idea that in a declining market, get an appraisal early in the application process. In other words, it may be an advantage to the applicant (you) to request the appraisal earlier from your mortgage broker. If values are dropping, the mortgage will be based on a higher value than if the appraisal was done just before closing. hmmmm…

This seems logical (but as a result, off-loads more risk to lenders), but I am not aware of any banks that my firm deals with that will generally honor an appraisal even if it is three to four months old. Even during the height of the market, I wasn’t familiar with appraisal valuation dates exceeding 90 days.

The appraisal is a perishable product, a snap shot of the market. Lenders are well aware of generally weaker market conditions than seen in prior years. In other words, when a market is deteriorating, one of the things a lender looks more closely at is the valuation date of the appraisal (and rumor has it, is actually reading the reports now). In changing markets, an underwriter’s comfort level drops significantly as the timeline from appraisal (valuation) date to closing date expands.

Possible summaries

* Recap (safe, generic version): In the cart before the horse analysis, the challenges facing the mortgage market will exaggerate the problems facing the housing market. Tightening credit and an elevated wariness within lending institutions toward home mortgages will temper any form of housing recover for the next few years.

* Recap (cynical, sarcastic, “late-night I’m tired” version): Weaker housing markets (price and volume) have caused more emphasis to be placed on (clearing throat sound) an actual understanding of the market values of collateral being used, with less emphasis on questionable lending practices and less volatile mortgage products. While there is certainly nothing wrong with being creative in lending, the backlash of tightening credit is in direct response to lax lending practices by the very same industry to begin with.

I wonder if any lessons have been learned in this housing cycle as it pertains to mortgages. When taking the long view, somehow I doubt it.