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slow real estate/ harder to get loans


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Just read this. Might interst some


LOS ANGELES - The subprime mortgage implosion will take even more steam out of the already slowing real estate market this year and beyond, according to a new economic report.

More than two dozen subprime lenders have shut down in recent months and others are scrambling to stay in business as a spike in defaults caused by borrowers unable to make payments has rocked the mortgage industry.

Now, as lenders tighten credit standards, the housing market will likely see further declines in price and output, senior economist David Shulman wrote in the quarterly Anderson Report to be released Monday by the University of California, Los Angeles.

“We suspect the problem in the subprime area is just the tip of the iceberg for the mortgage market as a whole,” Shulman wrote. “For all practical purposes, the subprime market is in the process of shutting down.”

A tougher credit environment will limit the number of first-time home buyers entering the market and make it tougher for others to refinance their subprime loans before they face a default or foreclosure.

Shulman expects housing starts to hit 1.33 million units this year, down from a previous forecast of 1.48 million units.

“For a housing market that has already witnessed housing starts decline by 36 percent, this is not good news,” he wrote.

Still, he does not forecast a recession but only a softening of the economy.

He expects growth in the nation’s gross domestic product to range from 1.7 percent to 2.5 percent through the first nine months of the year, and to average 3.25 percent next year.

The nation’s unemployment rate will tick up from February’s 4.5 percent to 5 percent by the third quarter before beginning a gradual decline, Shulman wrote.

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“We suspect the problem in the subprime area is just the tip of the iceberg for the mortgage market as a whole,” Shulman wrote. “For all practical purposes, the subprime market is in the process of shutting down.”

I am wondering what relationship Shulman thinks that there is in sub-prime vs conforming/prime rate loans industry. It is not any more difficult to get a conforming/prime rate loan now than it always has been. No one that only does conforming & Alt-A loans has failed due to the sub-prime market having problems. If you have a down payment you can still get a sub-prime loan. Having a down payment is what insures that a borrower won't just walk away from their home-thus there will be far fewer foreclosures.


The conforming lenders have always had loan programs that could take the place of the sub-prime loan programs, but they are harder to do so the programs got ignored. Most loan officers that only did sub-prime are learning those programs now. I admit that they are more exacting in documentation and are not for the bottom of the 20% of the market that were getting sub-prime loans, but the programs are available.

It is just like Manufactured Home loans. The largest reseller of them got out of the market in Jan of 05. That ended the market for a while. Now investors are getting back into that market-it is not easy to get the mobile home loans, but the loans are available.


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I think a lot of people are looking at this from a very skewed point of view. The explosion of the secondary mortgage market in the past few years allowed lenders to package and distribute the risk to investors. Therefore, the normal risk/reward balance by underwriters was out of whack.

The market seems to be returning to normal. If you can't come to the table with some collateral and show docs that you can actually pay the monthly payment, then it should be difficult to get funding since skyrocketing appreciation will no longer rescue a struggling homeowner.

The fallout may add a few hundred thousand homes to current inventory and keep prices flat for a while. This isn't a bad thing as it lets incomes rise to catch up. Everyone wants home values to go to the moon. In reality, this is a very bad thing as more income gets eaten up by interest and, for most people, any "gains" they make get rolled into the next purchase (unless you are selling your McMansion and moving into a tent).

Regarding rates, I expect conforming rates to stay put or slowly fall (it is looking like the bond markets are pricing in FED cuts in 3Q07). But subprime rates will go way UP where they should have been. For a lender, the true risk of holding a subprime note is higher than what was originally thought, and so the margin they need to hold the note must increase. Especially now that the secondary market has cut off purchases of subprime debt and the lender may be forced to hold the note long term.

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