by Mark Scheinbaum
American Reporter Correspondent
Angel Fire, N.M.
August 4, 2007
IF THE MORTGAGE CRISIS DOESN'T GET WORSE, IT'LL GET BETTER
ANGEL FIRE, N.M., Aug. 3, 2007 -- In a dispatch buried now in the American Reporter archives, we first alerted readers early last Fall about the domino effect of mounting foreclosures. This morning, a major mortgage originator and lender, American Home Mortgage Investment Corp. announced the de facto end of its operations, Some 7,000 employees are fired, and there's a significant likelihood of the company declaring bankruptcy in coming weeks.
A skeleton crew of just 750 employees will remain for a company which wrote $59 billion (that's a "b") in loan business last year. Ironically, American Home dealt with people who were actually above the "sub-prime" category, but who were attracted to, or perhaps lured into, lowball adjustable rates which later increased their monthly payments, sometimes dramatically and ruinously.
For the typical consumer, investor, mortgage holder and reader, the message is foggy, but as you peer through the news, patches of clarity and a pattern emerges: Solid people with little debt and prudent money management practices; kids out of college or the military; retirees looking to refinance; and folks who are relocating, or simply trading up or down as lifestyles dictate, are all going to face long waits and possible denials on mortgages.
Starting around Christmas 2006, we noticed delays in routine paperwork for mortgage underwriting. Then in February and March, people who usually had competing offers, unsolicited requests for refinancing, and top-flight mortgage brokers who were wined and dined by pools of dozens of lenders for your business, reported they were lucky to have four or five mortgage choices for clients.
Attorneys specializing in real estate started layoffs of office staff and pared expenses as five closings a week became one or two per month. By early Spring, the lack of "proof" of income became the exception, and "qualified" A-rated borrowers were asked ad nauseum to resubmit the most minute details of income, savings, etc.
What little housing was left for resale and new construction was further constrained by lenders whose "bundlers" (the companies that buy mortgages) were pressured by their shareholders to reduce their exposure to defaults and foreclosures.
The crystal ball is in the shop for repair. Flying partially blind, my best estimate is that the problem will work itself out, mortgage rates will come down, housing will rebound, and bargain hunters will start jumping back into the real estate market with both feet around the second quarter of 2009.
But some of the top researchers in the country say there is yet another wave of trouble peering out at them from the financial horizon, dimly seen now but likely to resolve in market weakness not too long from now. They say that here and there, in a manner that is starting to suggest a significant pattern, borrowers who were rated as "prime" - i.e., not the banks' worst customers but the best - are also starting to fold their credit cards and default on loans and mortgages.
If this troubling data does not materialize into a second wave of precipitous drops in the Dow and new lender bankruptcies, the foregoing scenario ought to hold. If it does come to pass that some larger lenders fail, though, playing the stock market will be a lot more like the white-water rafting we saw this week.
AR Finance Correspondent Mark Scheinbaum is a veteran UPI reporter who now serves as Chief Economist to Boca Raton-based Kaplan & Co., NASD, members of the Boston Stock Exchange.