History repeating itself, the Great Financial Crisis exposed the lack of sound underwriting and oversight in the mortgage industry prior to the collapse in 2008. Since the GFC, the majority of residential mortgages have been provided by ‘non-bank’ lenders. These lenders have not been well regulated and are under-capitalized; many have already requested federal assistance. Many of the same issues encountered in the mid-2000’s are prevalent today, such as down payments as low as 3% not uncommon.
Mortgages are difficult to obtain now that lending requirements have tightened. Several major banks recently announced they are requiring 20% down payments and a credit rating of at least 700 for new mortgages. Several have also stopped making HELCO loans. Recently several large banks reported their financial results and have now set aside over $20 billion in reserves anticipating a surge of defaults and a devaluation of collateral. They see what’s coming and are attempting to reduce their risk exposure to the real estate market. They are hoping to avoid a repeat of the GFC when they were exposed to huge write-offs and required taxpayer bailouts.
Moody’s is forecasting that as many as 30% of US mortgages could stop paying their mortgages if the economy remains closed for a few more months, that’s approximately 15 million. Many economists are predicting increasing unemployment numbers that will exceed 20% of the workforce. One report shows that 45% of Americans employed prior to the government forced shutdown are either unemployed or working fewer hours. Once again the market will experience rising foreclosures and borrowers unable or unwilling to continue making payments on a property when their equity has vanished. In the near term private lenders will reappear to fill the void left by banks and ‘non-banks’ as they exit the market. They will offer first or second trust deeds but at significantly higher rates as they price in the new perceived risk. There will be financing but at a premium for buyers.
Demand Stops
As a result of the economy shutting down the pool of potential buyers has dropped precipitously. Some of factors creating this sudden drop in demand include: uncertainty of employment; increased underwriting requirements and high rates for financing; move-up buyers unable to sell their existing homes. These are a few factors that will put pressure on re-pricing. As values decline more buyers will delay purchases until they see price stabilization at reduced levels.
The real estate market is now in the early stages of experiencing a market upheaval that will lead to re-pricing at much lower levels than the recent all-time highs.