The mortgage industry took a turn for the worse last year, as many people were forced to foreclose on their new homes and mortgage companies were compelled to close their doors. Foreclosures contributed to near-record-level inventory in a housing market that, recently, had so few homes available for sale, new listings often ignited bidding wars and residential developments had lengthy waiting lists. So, where is Nevadaās real estate market headed? Has it finally reached rock bottom? Will it ever be as hot as it was once before?
The āFreezeā
As circumstances continued to deteriorate for the mortgage industry, and those with mortgages, it became necessary for the government to step in. In December, President Bush introduced a solution to limit the disruption to the economy entitled The Hope Now Alliance. The proposal calls for a five-year freeze on interest rates for those who can afford to keep making their current mortgage payments, but might be at risk for foreclosure if their adjustable rates ballooned at the end of the locked period. Around 1.2 million homeowners are expected to benefit from this program. The Federal Housing Administration, in addition, launched a new program called FHA-Secure, which helps refinance existing loans to borrowers whose ARM rates are increasing.
What does this mean to mortgage brokers? Will the industry turnaround and prove itself again? The answers to these questions may depend upon the source and the locale, as well as varying market conditions.
Many industry experts agree that the presidentās freeze on rates is a good start to ease the pain many have experienced in the last year. āThe freeze will help with the extreme cases ā sub-prime loans ā which only represent about 6 or 7 percent of all loans,ā said Eric Cross, senior loan consultant manager at Southwest Commercial Real Estate in Las Vegas. āBut of that percentage, about one third are delinquent or in default ā thatās the scary part.ā Although the freeze may be beneficial, certain requirements must be fulfilled before a person is eligible. It will only help those people who are not behind on their loan originated between January 2005 and July 2007. Of course, the freeze is good only for primary loans, and does not apply to investors or speculators who tried to make money in the market, said Cross. Marcie Benvin, broker/owner of Cetus Mortgage, Ltd., which specializes in construction lending on residential loans in Reno, disagrees and feels that the freeze will have little impact for borrowers who are in trouble with their loans. āIf the government wanted to help the owner-occupied borrowers, they would raise the FHA loan limits and allow people to refinance into an interest rate they could handle,ā she said.
How did the mortgage industry get into such a mess, and how will it recover? Many blame Wall Street because it had so much money to lend. Companies that didnāt have a mortgage background were suddenly providing loans as a way to pick up extra business, said Cross. With the influx of firms entering the high-profit-margin mortgage industry, traditional loans and qualifying standards were lowered. Another factor involved the Option ARM loans that were sold to people without their total understanding of the loan and how the interest rate could change dramatically.
āI think the market will correct itself over time,ā said Steve Brockman, president of Builders Capital Inc. in Las Vegas. āGoing forward, buyers will have to qualify for financing based on more conservative guidelines such as down payment, income, credit score ā the system that worked quite well for decades prior to the run of sub-prime lending.ā
Competition in the Marketplace
Larger banks in the state have become more competitive in the mortgage industry. āThey are surviving the market conditions because they have higher deposits that keep them well capitalized,ā said Cross. āThere is a stark contrast, however, to mortgage bankers ā they donāt have the depth of cross-collateralization.ā According to John Moran, principal of Moran Financial Services, a commercial real estate finance company, the banking community has pulled back somewhat due to the volume of home loans and hard money lenders, combined with the availability of land.
Banks have survived the current market conditions, but many mortgage bankers have gone out of business as a result. āBanks are huge competitors for commercial projects,ā said Benvin. āAlthough they are scrambling for good loans in todayās market, banks can be highly competitive on their rates and fees, which further tightens the market.ā
Falling Interest Rates
The commercial mortgage industry has been affected by the residential mortgage meltdown, which has resulted in higher interest rates, lower loan amounts and more stringent underwriting criteria. āAs a result of the mortgage crisis, spreads on commercial loans have increased as investors demand a higher return on mortgage-backed securities,ā said Brockman. āThe increase in spreads has caused higher interest rates on loans even if the underlying index is unchanged or slightly lower than in recent months.ā
However, interest rates are still hovering in the lower range and analysts believe they will continue to decline. āInterest rates will continue to fall throughout 2008, as this is the only thing that can help the market,ā said Benvin. āAt low interest rates, people can refinance and lower their payments.ā Although these low rates will be an incentive for prospective homebuyers, it is not expected to create another housing boom.
Raising the Bar
The influx of people who moved into the mortgage brokerage field was followed by an exodus. Instead of residential brokers migrating to the commercial side, they have fled the industry as a whole. āThe commercial mortgage business is not what it was a few years ago, but it hasnāt been hit nearly as hard as the residential side,ā said Brockman.
However, a number of residential brokers perceive greener pastures on the commercial side of the lending fence. āSome brokers have experience in both residential and commercial ā but that number is few,ā said Benvin. āMy concern is that brokers are jumping into the commercial market without the knowledge and experience to handle commercial loans.ā
The state of Nevada, however, has raised the bar for those coming into the profession. āLicensing requirements are tough enough, but are about to become tougher in Nevada,ā said Benvin. During the 2007 Legislature, Gov. Jim Gibbons signed AB 375, which mandates testing and/or additional educational requirements before a person can obtain a brokerās license. āWe have some of the most rigid requirements coming online in 2008 to originate loans for mortgage brokers,ā she said.
Looking Ahead
Last yearās housing slump and foreclosure rate contributed to the industryās current downturn. As all good things must come to an end, most industry experts agree that the residential market has reached the bottom and will regain momentum ā partly in response to projects on the Strip ā toward the latter half of the year. āA pent-up demand for new and used homes is growing across the Las Vegas Valley,ā said Moran. āAnd, in turn, I think the residential market is going to turnaround this year.ā
Where does the commercial sector stand in the coming months? Will it experience similar issues as the residential sector? āLater this year, commercial real estate will see a lag effect from the residential market,ā said Cross. āIt wonāt be as dramatic though, because qualifying standards are completely different for business loans.ā In Northern Nevada, the commercial market is expected to slacken, as well. āWe [in Northern Nevada] will experience a slower growth rate until the end of the second quarter of 2008,ā said Benvin. āWe currently have an oversupply of garden office space which will take some time to sell.ā
As with any cycle, the market will come back around and recover with time. Most experts agree that the residential market, as well as increases in commercial lease rates will rebound in the second half of this year. After all, Nevada is a state known for its low taxes and business friendly economy which has helped recruit many to move here. Similar to the domino effect, when one market falls, its counterpart falls, too, and when one market remains strong, the other follows suit.