If you want to make lenders happy — and if you want to enjoy low mortgage rates — then the best and most-certain approach is to avoid delinquencies and foreclosures.
A new report from the Mortgage Bankers Association tells us that lenders should be elated with the latest news: delinquency and foreclosure rates have declined to their lowest levels in six years. Fewer problem loans mean there is less risk in the mortgage industry, less risk attracts more investors who want to put their money into safe-and-comfy home loans and a larger supply of money holds down mortgage rates.
Six years ago — back in 2008 — the economy was a mess. Fannie Mae and Freddie Mac were taken over by the federal government; Merrill Lynch — then the nation’s largest stock brokerage — announced a 2007 loss of $8.6 billion, while Lehman Brothers declared bankruptcy and said it owed $613 billion.
Prior to the mortgage meltdown lenders and investors pretty much expected that .4 percent of all home loans would fail, that about 200,000 loans out of some 50 million would be foreclosed each year. With rising home values foreclosures were fairly rare because in the usual case if owners got into financial trouble they could quickly sell their property on the open market, pay off the lender and no one would be the wiser. The result was no foreclosure and no credit dings.
The mortgage meltdown set off a huge foreclosure activity increase. Figures from RealtyTrac show that foreclosure actions increased 42.2 percent in 2006 and another 75 percent in 2007. During 2009 nearly 4 million foreclosure notices were mailed, an astonishing total.
Now, says Lawrence Yun, chief economist with the National Association of Realtors, foreclosure rates for Fannie Mae and Freddie Mac are between .1 and .2 percent. In other words, the foreclosure rate today is actually lower than before the mortgage meltdown.
Why The Real Estate Market Is Better
How did we get such good results? There are several reasons:
First, mortgage rates fell to historic lows in 2012 and early 2013. Even in early 2014 mortgage rates are roughly half the average level seen during the past forty years according to Standard and Poor’s.
Second, since 2009 more than 8 million home owners obtained mortgage modifications. The government’s Home Affordable Modification Program (HAMP) has been used by 1.9 million borrowers. Those who are able to stick with the program save on $546 per month, better than $6,000 per year.
Third, home prices are coming back. According to the Federal Housing Financial Administration, real estate values have now risen for 10 consecutive quarters. While not all metro areas are seeing price improvements, and while home values nationwide remain below the 2007 peak, the number of underwater homes has dropped significantly as a result of rising home values: According to RealtyTrac, 9.3 million homeowners were underwater in December 2013. That’s a huge number, but it’s surely better than the 12.8 million with negative equity in May 2012.
Fourth, people are feeling better about the lending process. Despite urban legends that mortgages would be impossible to get once new Dodd-Frank lending rules kicked in, most people now see real estate financing as more attainable than in the past.
“A majority of consumers now believe that it is getting easier to get a mortgage. For the first time in the National Housing Survey’s three-and-a-half-year history, the share of respondents who said it is easy to get a mortgage surpassed the 50-percent mark, exceeding those who said it would be difficult by 7 percentage points,” said Doug Duncan, senior vice president and chief economist at Fannie Mae. “The gradual upward trend in this indicator during the last few months bodes well for the housing recovery and may be contributing to this month’s increase in consumers’ intention to buy rather than rent their next home.
Fifth, it turns out that lenders are perfectly capable of making loans under the new standards, despite every possible effort to derail Wall Street reform legislation, undermine the Consumer Financial Protection Bureau and delay new regulations. An estimated 92 percent of all lenders were in compliance before January when many new guidelines formally went into effect.
Lastly — and it should be said “hopefully” — the worst of our problems are over. Many of the mortgage-related issues we have today represent the remnants of the go-go lending era from 2000 through 2008, a period when toxic mortgages were widely marketed and “no doc” loan applications were encouraged. Now, six years later, we’re still cleaning up the mess but each month there is less to clean.
“Loans originated in 2007 and earlier accounted for 75 percent of the seriously delinquent loans, while loans originated in 2008 and 2009 accounted for another 16 percent,” said Michael Fratantoni, MBA’s chief economist and senior vice president. Fewer than 10 percent of the foreclosures we see today are related to loans made after 2009.
Lenders and mortgage investors understand these issues, the very reason mortgage rates remain so low, Wall Street firms are buying single-family homes by the bunch and the real estate market is largely stabilized. Will the good times continue? We don’t know. The big question is whether household incomes will begin to rise after years of stagnation — incomes today are lower than in 1999. Without rising incomes it’s tough to imagine how home prices can continue to rise and bigger mortgages can be justified when the additional money needed to pay for steeper housing costs just isn’t there.