SonnyPage on Loan Quality
He is a realator in Atlanta....
I had a closing late this morning. On this one, I represented the seller, so Brian, my preferred mortgage lender, was not there with me. When I made it back to the office around one he still had not eaten, so we headed downstairs to the Thai Thai for our daily fix of spicey Thai food. The Thai Thai is also where we seem to do our brainstorming; one realtor and one lender trying to put together our pieces of the gigsaw puzzle that is our economy. Somehow we got on the subject of loan quality. My question to Brian was, how would you compare the quality of your applicants today to, say, this time last year. His response was, maybe a little worse, but not that much. I asked, what percent of your loans would you say are really borderline? His reply, twenty percent or so. Then he thought and said, you know, the real difference I think is with loan quality of maybe three years ago or so, before 911, before the slowdown, there's quite a lot of difference.
Brian gave a great example. He is working with a buyer sent to him by another agent in our office. This buyer can't qualify for a "swing loan", that is, buy house "B" without selling house "A" first. He has no equity in his current home and plenty of credit card debt; he clearly has negative net worth. Yet he can qualify for a loan under today's guidelines as long as he closes on House "A" before closing on house "B". Brian's final comment was, there is absolutely no way he would have qualified at all three years ago. Requirements have really been dumbed down.
So follow me on this. Short rates go up, where many loans are, and virtually all borderline loans. The immediate effect is a significant number of today's potential buyers effectively vanish, they can no longer qualify. They can sell what they have, but can no longer buy. You have an instantaneous glut on the market, sellers drop prices to compete for fewer buyers. Those sellers under water become more so, default, prices drop more, more defaults. This could develop quickly if and when it gets started.The federal reserve, perhaps all of us, have a huge stake in keeping this particular balloon inflated. It does not necessarily need to keep inflating, just God forbid if someone lets the air out. I can envision absolutely no scenario of us having any hope of growing our economy and staying out of recession with a collapsing real estate market and the devastating collapse of consumer confidence that would go with it.
That open invitation to lunch at the Thai Thai still stands. I hope to see some of you down here on the north side of Atlanta one of these days. My best to you all.
sonnypage |
