Banks and the Housing Recovery
Banks Tightened Credit in Second Quarter
Loan Standards
Banks
tightened standards on all major types of loans to businesses and
households during the second quarter, mainly to reduce risk during what
is still an uncertain economic outlook. The banks are weak and they are
looking at big problems on the horizon. The foreclosure pipeline is
stacked and will continue to be a problem until we see job growth.
Declining job loss is good news, but its not growth.
Commercial Recasts
They
are also facing a big commercial mortgage recast. All of those
developers and owners of office buildings and big apartment complexes
that have bought or built in the last five years, will be looking to
refinance their loans. The banks are anxious, after all, business have
felt the brunt of this recession. The result for owners are higher
vacancy rates and lower rent rates, a recipe for evaporating equity.
Option ARMs
Next
year, many option ARM payments will begin to readjust, slamming
borrowers with dramatically higher monthly mortgage payments. Analysts
say that could unleash the next big wave of foreclosures. Nationally,
close to one in ten who bought homes between 2004-2008 used an option
arm mortgage. In the San Francisco bay area the number is closer to one
in five.
After five years the mortgages reset and become market
rate principal and interest mortgages. This can more than double the
monthly payment, putting a lot of home owners out of business fast.
Option ARMs were common choices for large loans and luxery homes will
be hard hit. Borrowers who bought at the height of the market will be
facing mortgage recasts around 2010, at the same time the banks will be
facing commercial mortgage recasts.
The Recovery
The
Federal tax credit and the phase out of treasury bond purchases will
put some pressure on the housing markets. Tighter loan standards by the
FHA and banks in general will also cause to quiet any push towards a
meaningful recovery in the short term.
Sales of previously owned
homes fell 2.7 percent from July to August, ending a run of four
consecutive months of increases. NAR echoes the point, Nevertheless,
the decline demonstrates "we can't take a housing rebound for granted,"
Yun, economist for NAR said
The Good News
Most
of the foreclosure problem is still contained to four states,
California, Arizona, Florida and Nevada. Much of the rest of the
country is making mortgage payments on time. Same can be said for the
apartment sector. Generally, the sector didnt overbuild and the
expectation is that renter demand, now slack, will overtake supply in
the next few years. As the Fed removes the training wheels and the
system begins to stand on its own, you can expect it to be a little
wobbly at first
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