Subprime Crash Squeezes First-Time Buyers Out of Housing Market
By Bob Ivry
June 13 (Bloomberg) -- Josh Tullis, who in his eight years as a senior loan officer rarely felt compelled to reject a first-time home buyer's mortgage application, is saying ``no'' in 2007.
Tullis's latest clients are a married couple that banks ought to love. Between them they make $70,000 a year and they've been renting the same apartment for three years with zero late payments, he said.
Lenders don't love them because they have no money in the bank, said Tullis, Virginia sales director at A. Anderson Scott Mortgage Group in Falls Church. With mortgage companies cracking down due to rising subprime defaults, Tullis needs them to sock away two months of payments for the $500,000 townhouse in Fairfax.
``Six months ago, these folks might have qualified, a year ago, definitely,'' Tullis said. ``It's a lot, lot harder than it used to be for first-time home buyers.''
Subprime mortgage lenders have tightened credit guidelines so much they're squeezing about 500,000 first-time buyers out of the market, according to the National Association of Home Builders. A decline of that magnitude would reduce sales of new homes by 4 percent and sales of existing homes by 7 percent, and deepen the worst housing slump since the Great Depression.
Shares of homebuilders, including Toll Brothers Inc., fell more than 6 percent in the past year, while shares of apartment owners such as Sam Zell's Equity Residential advanced more than 10 percent as potential homebuyers keep writing monthly rent checks.
Tishman Speyer Properties LP and Lehman Brothers Holdings Inc., both based in New York, agreed last month to buy Englewood, Colorado-based Archstone-Smith Trust, the second- biggest U.S. apartment owner, for $13.5 billion.
Drop of 500,000
About 2.5 million people will buy homes for the first time this year, down from 3 million in 2005, said Gopal Ahluwalia, staff vice president for research at the National Association of Home Builders in Washington, who based the estimate on analysis from the U.S. Census Bureau and the National Association of Realtors in Chicago.
``The impact will be negative for overall housing demand and keep the housing market in the correction phase for longer than it would have,'' said Celia Chen, director of housing economics at Moody's Economy.com in West Chester, Pennsylvania.
A lack of buyers means fewer sales even in neighborhoods where there are few if any subprime borrowers, affecting companies such as Toll Brothers, the largest U.S. builder of luxury homes.
Fewer than 2 percent of Toll's customers are subprime borrowers, said Chief Executive Officer Robert Toll. Still, the company is feeling the effect of tighter money, he said in a conference call last month.
`Housing Food Chain'
``It appears that the impact of stricter lending standards, primarily arising from problems in the subprime market, is negatively affecting affordability at lower price points,'' Toll said. ``This in turn can and probably does impact the entire housing food chain including some of our potential customers' ability to sell their existing homes.''
Tightened lending was a factor that ``may have served to impede the glimmers of a rebound we had started to see in early February,'' Toll added.
Shares of the Horsham, Pennsylvania-based homebuilder declined 16 percent since the start of the year, compared with the 20 percent drop of the 16-member S&P Supercomposite Home Builder Index.
``You're safer taking a ride with Lindsay Lohan than being in homebuilder stocks,'' said David Lichtenstein, chief executive officer of Lightstone Group LLC in Lakewood, New Jersey, which owns malls and hotels. Actress Lohan was arrested May 26 for driving under the influence after crashing her car.
`Domino Effect'
The biggest losers are homebuilders that cater to first- time buyers. Shares of Ryland Group Inc. in Calabasas, California, declined 24 percent this year; Centex Corp. of Dallas fell 22 percent; Fort Worth, Texas-based D.R. Horton Inc., the largest homebuilder by market value, dropped 20 percent; and Hovnanian Enterprises Inc. of Red Bank, New Jersey, slumped 40 percent.
``It all comes back to the first-time home buyer,'' said Gary Balanoff, a real estate broker at ReMax Select in Oviedo, Florida. ``If they could buy, we'd see a much better housing situation for everyone because it would start the domino effect.''
First-time buyers fortified with easy credit bought an estimated 26 percent, or about 322,000, of newly built homes in 2005, according to an analysis of data from the American Housing Survey of the U.S. Census Bureau in Suitland, Maryland. That year they also purchased about 40 percent, or 2.72 million, of existing homes, according to the National Association of Realtors.
Subprime Mortgages
The closing or sale of more than 50 mortgage companies and stricter credit rules will reduce subprime lending to $350 billion this year, a 47 percent drop from the $665 billion that the industry lent in 2005, according to Seattle-based Washington Mutual Inc., the largest U.S. savings and loan.
``There's no question borrowers had an easier time six months ago than they do right now,'' said Chris Hutchens, a loan officer with Alpha Mortgage Corp. in Wilmington, North Carolina.
About 20 percent of U.S. mortgages issued last year were subprime loans to borrowers with bad or limited credit histories. One in four subprime home purchasers the last two years was a first-time buyer, according to the Washington-based Mortgage Bankers Association.
Rental Demand
Federal Reserve Chairman Ben S. Bernanke said June 5 that tighter money will ``restrain housing demand, although the magnitude of these effects is difficult to quantify.''
At the peak of the five-year U.S. housing boom that ended last year, about 30 percent of apartment renters who moved out of their units did so to buy a home, according to New York-based UBS Securities LLC analyst Alexander Goldfarb. That number is now about 20 percent, he said.
Rents rose by an average 10 percent in New York, Los Angeles, San Francisco, Washington and Seattle, according to UBS. In 2007, rents may rise another 6.5 percent in those cities, UBS said.
``There's a strong demand for rental apartments as the home market is finding its bottom,'' Goldfarb said.
Sales of existing homes in the U.S. fell in April to the lowest level in almost four years, according to the National Association of Realtors.
New-home purchases surged 16 percent in April, the highest jump in 14 years, buoyed by an 11 percent price decline, the biggest since 1970, according to the Commerce Department.
Delinquency Rates
The number of subprime borrowers who were behind in their mortgage payments in the fourth quarter of 2006 was the most in more than four years, according to the Mortgage Bankers Association.
Calabasas, California-based Countrywide Financial Corp., the biggest U.S. mortgage lender, made 60 percent of its subprime loans for home purchases to first-time buyers in the fourth quarter. The bank will reduce that to about 16 percent, Chief Operating Officer David Sambol said in a conference call.
Countrywide Chief Executive Officer Angelo Mozilo said in an interview that the cutback was made in response to concerns about the viability of subprime loans issued last year.
``We need to take a step back and make sure this readjustment hasn't gone too far,'' Mozilo said.
First-time buyers have a delinquency rate of up to 40 percent higher than other borrowers, said Andy Chawla, senior vice president for risk management at IMPAC Mortgage Holdings Inc. in Irvine, California.
`The Game'
Subprime lenders have responded by funding less of the purchase prices of homes. Simply requiring a down payment of as low as 5 percent will disqualify one in four of the first-time buyers who were IMPAC customers a year ago, Chawla said.
``We're asking for skin in the game,'' Chawla said.
About 5 percent of the loans issued by Countrywide Financial this year will cover the full price of a home, down from 25 percent in 2006, Sambol said.
WMC Mortgage Finance Co., the Burbank, California-based division of General Electric Co., requires a minimum borrower contribution to the down payment of 15 percent, said spokeswoman Brandie Young. Until this year, the company issued loans for 100 percent of the home price.
Investment in the residential housing industry -- home purchases, new construction, renovations, brokers' commissions and expenditures for equipment built into structures, such as heating and air conditioning -- declined at a 17.2 percent annual rate in the first quarter of 2007, according to a study by the Mortgage Bankers Association.
Weak Standards
Shutting out borrowers won't improve those numbers, said Doug Duncan, the Mortgage Bankers Association chief economist.
``There were clearly weak underwriting standards in 2006 and the pendulum has swung pretty hard in the other direction,'' Duncan said. ``It's probably gone further than it should have gone.''
The swinging pendulum has Tullis, the loan officer trying to get a mortgage for the Virginia couple, longing for the good old days of 2006.
``They have a 648 credit score,'' Tullis said of the couple who were turned down for a loan. ``With a credit score of 580, you used to be able to go anywhere and get a stated income loan for 100 percent of the price of the house. Nowadays, first-time home buyers really have to prove themselves.''
To contact the reporter on this story: Bob Ivry in New York at bivry@bloomberg.net .
Last Updated: June 13, 2007 00:10 EDT
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