Nicholas French, Broker Associate, CRS
August, 2007
Inside this issue:
Mortgage Market 1 out in some lending institutions while others have drastically amended their lending guidelines.
Shakeup
Mortgage Market 2 stand the effect it is important to understand the cause and history of the recent market, its stages
Shakeup (cont)
Nicholas French
Broker Associate, CRS
4906 El Camino Real #2
Los Altos, CA 94022
650 773 8000 (cell)
650 961 2338 (office)
650 961 5238 (fax)
nfrench@cattonproperties.com
RE Special Update
Mortgage Market Shakeup
The past several weeks have been a rollercoaster ride for the mortgage market. The lights are
Over the next several weeks and months we should see more lenders and Brokers with office
space clear from wall to wall. But what is causing all of this upheaval in the market? To under-
and how the real estate industry has played a role through the cycle and into the near future.
After the stock market crash in 2001, investors were looking for the next great place to store
their money. With the Fed aggressively lowering the short-term rate (see graph pg.2) and the
stock market being the last place for investors the transition came to real estate. Soon after
mortgage rates began coming down partially due to the large amount of cash on hand with the
banks new loan programs were created providing an opportunity for less than qualified buyers to
purchase homes and speculators to come out in full force, the rest is history. Practically every
individual had an opportunity to purchase a home even with little to no money out of pocket.
From mortgage brokers, to real estate agents to the media, it was a great time to buy a house and
“why rent when you can own” was the rhetoric heard throughout.
But what was the progression of the mortgage industry through this period? The history of our
cycle begins with Wall Street viewing mortgages as stable and high returns buying bulk loan
packages for the various funds. Lending institutions recognized an opportunity to provide loans
at a lower rate by selling in the secondary market to Wall Street instead of holding in their port-
folios, making a profit and then having the ability to fund more loans; this strategy was done
over and over again. Lending institutions competed with each other to issue loans to borrowers
lowering rates and guidelines to get out their money. Guidelines lowered creating an opportu-
nity for less than qualified borrowers and investors to obtain easy financing. This influx of
money into the mortgage market wouldn’t be complete without a run-up of real estate demand
and therefore prices. Over the real estate boom from 2002-2005 an unprecedented number of
buyers entered the market for such reasons as 1) affordability, 2) real estate stability, 3) specula-
tion or investment, and of course 4) timing or lifestyle for family. Money was cheap and we
knew it; why wouldn’t we want to take advantage of this opportunity?
Now we are seeing mortgage companies going out of business and lenders drastically changing
their guidelines, programs and approval process (see matrix pg.2) due to the fact that Wall Street
halted the purchase of loans in the secondary market after many months of defaulting mortgages,
less than appropriate profit from lending institutions and fears that the worst is not over. In
Santa Clara County the foreclosure rate is up with almost 600 homes sold at auction year to date.
Approximately 80% of these properties went back to the bank because there was not enough
equity to make for a viable purchase. Lenders will now face the reality of holding their loans in
their portfolios instead of just pushing them off into the market because Wall Street is precau-
tious. Most people will agree that you watch your money better than your neighbor, so naturally
if you were loaning your money you will be more cautious. This compounded with the fact that
the lenders will not have as much money to loan; funds will now go
 Fed Rate
Mortgage Market Shakeup (continued)
Date Perc.
2007 to more qualified buyers with larger down payments, better credit scores and more security. Addi-
7-Aug 5.25 tionally, with loans staying in the portfolios a higher margin is necessary to suffice stockholders and
21-Mar 5.25 profit targets. Those loans that are sold in the secondary market will be stronger and safer borrowers
31-Jan 5.25 with less default rate than what we’ve seen over the past several quarters.
2006
12-Dec 5.25 So the next logical question is how will this affect the real estate market? As with any market it is
8-Aug 5.25
important to seek a property that is best fitted to you and your family’s needs. It is important to have
extraordinary representation that has familiarity of the market, the ability to negotiate aggressively
29-Jun 5.25
and resilience to go after those deals. This is valuable time in the market to seek good properties in
10-May 5 the best neighborhoods that are good homes for your family. My clients are patient and already seek
28-Mar 4.75 the best properties and good prices, so I am not saying anything you haven’t already heard. Do not
31-Jan 4.5 feel pressure from the rhetoric of “if you don’t buy now you will miss the market”. It’s time to seek
2005 those great properties! For sellers, be mindful that financing is crucial to buyers looking to purchase
13-Dec 4.25 your home. Be mindful of the affordability for buyers, lenders will. We have seen a number of ma-
1-Nov 4 jor changes to the mortgage industry and its affects on the real estate market have not been fully real-
20-Sep 3.75
ized. I will maintain my dedication to my clients and update you appropriately with any market ad-
justments. I can also put you in contact with the best loan broker to answer any of your specific ques-
9-Aug 3.5
tions. She knows her information! Feel free to contact me anytime.
30-Jun 3.25
3-May 3
22-Mar 2.75
2-Feb 2.5
2004
14-Dec 2.25
11-Nov 2 Recent changes to the mortgage industry that may
21-Sep 1.75
11-Aug 1.5 affect your ability to obtain financing:
30-Jun 1.25
2003
1 American Home Mortgage, the 5th largest bank in the US for mortgage lending, is gone
25-Jun 1
2002 Wells Fargo closed its sub prime lending division, halted Alt-A wholesale and discontin-
2 ues stated income 95% and 100% loans
6-Nov 1.25
2001 3 Wells Fargo discontinues stated verified/stated asset 100% loans
11-Dec 1.75
4 National City, SunTrust and IMPAC stopped their Alt-A products
6-Nov 2
2-Oct 2.5 5 IndyMac and Deutsche Bank discontinued their MTA adjustable programs
17-Sep 3 6 Indy and UBS discontinued all doc types below SIVA
21-Aug 3.5
7 Saxon closed its correspondent division
27-Jun 3.75
15-May 4 Greenpoint Mortgage discontinues a large portion of their product line. Even if you are
18-Apr 4.5 8 locked and approved you either have to have a higher credit score or go somewhere else
20-Mar 5 9 Aegis Wholesale closed their doors early this week
31-Jan 5.5
10 Washington Mutual discontinues a large part of their product line
3-Jan 6
2000 Interest only loans can only qualify at a fully amortized payment; therefore making it more
16-May 6.5 11 difficult to qualify
21-Mar 6
12 Majority of lenders are now requiring higher credit scores and more money down
2-Feb 5.75