KEY POINTS:
The credit crunch is not only making mortgage financing tougher, it will force more homeowners into mortgagee sales. The surge of more bargain homes on the market will further depress prices. Along with a corresponding pinch on home equity, car loans and credit cards, this pullback doesn't bode well for the economy.
The credit industry has become an inadvertent cheerleader for a recession. Consumers who can't borrow typically don't spend on items such as homes, cars and remodelling projects. It's a punishing economic boomerang of mass psychology.
Only those with above-average credit ratings will fare well in the purge of the riskiest kinds of mortgages from lender portfolios.
George Jenich, owner of Milwaukee-based Lender Rate Match LLC, which runs an online mortgage service, said all but the largest lenders have curtailed or halted their offerings of the riskiest kinds of loans. That includes sub-prime, so-called Alt-A, stated income, no-documentation and 100 per cent financing.
The feeble state of the home market could become even worse as homeowners face higher property-tax and insurance bills in coming months.
Those who can barely afford mortgage payments are often forced to sell or are pushed into foreclosure. This is a pronounced problem in coastal markets where properties are most expensive and in areas where speculation ran rampant, such as Florida and Nevada.
Congress, market regulators and the Federal Reserve are trying to prevent a liquidity crisis that will cripple the already depressed home market.
Yet it may be too late to contain the collateral damage. At the end of last year, there were an estimated 7.5 million sub-prime mortgages totalling US$1.4 trillion, according to researcher the Centre for Responsible Lending. Some 20 per cent to 30 per cent of those loans may result in foreclosure. All told, the centre predicts more than two million Americans will lose their homes.
Last month alone, foreclosures almost doubled compared with a year earlier, according to a property tracking service. Hit hardest were those who were trying to refinance but couldn't obtain loans after their adjustable-rate payments rose. Also hurt are those homeowners refinancing loans who have no equity or money down.
The trigger point for what industry experts say will be the next wave of foreclosures is November - when the next resets are scheduled - and then in April.
Americans looking for a mortgage for a second home loan and have less-than-stellar credit will have to look long and hard. As mortgage lenders duck risk, like beachfront dwellers fleeing an approaching storm, these kinds of mortgages have become scarcer.
Lenders who got cold feet en masse after the sub-prime loan debacle are even avoiding some loans for more affluent homebuyers.
"There are fewer options for the credit-challenged," says Gerri Detweiler, author of The Ultimate Credit Handbook. The credit industry will eventually adjust to the new reality of tighter standards after the free-wheeling, no-money-down days that ended last year.
It's too late for regulating out of this morass. In the meantime, anybody needing a loan will need more savings in the bank and extensive documentation to prove income and assets. That was a safeguard all along.
Why does it suddenly seem like a good idea to the industry and Washington?
-BLOOMBERG
