Low interest rates and no loans … what’s going on?
The market is very confusing to consumers. One article claims that inventory of homes for sale is rising and another will cover the fact that interest rates for mortgages are at “historical” lows. Yet, homes remain on the market (even at depressed prices) and those that would like to buy are finding out that the qualifications needed for a loan are more stringent.
If lenders need to make loans to make money, why aren’t they loosening up the purse strings? If home values are as low as claimed, why aren’t more people snapping up these bargins? It is a very confusing market.
I am not a mortgage lender. I can not begin to explain all the intricacies of bundling and packaging and all that went on during the boon of the mid-2000″s. I do have a pretty strong background in an industry that went through similar pains. I will share that experience and try to relate it to real estate.
Let’s talk music and video. For the longest time a record store was a staple of many communities. Some folks still wax nostalgic recalling the listening booths and weekly release of 45’s. Buyers were at the end of a very elaborate system of production, advertising, distributing and retail sale. For the purpose of this example, the major record label was like the bank that offers mortgages.
The record labels product was the music, the banks product was money. The music was created an recorded onto a vinyl record. The money was deposited and placed into a mortgage note. The record label would advertise it’s newest releases at discounted price points to create a demand. The bank would advertise how much money was available at certain rates to create demand.
Distributors would take pre-orders from their customers. Depending on the customer’s track record, they could order product at various price points. Banks would take pre-orders from their customer. Depending on the customer’s track record they could request funds at various price points. The record stores would advertise the product and put it on sale. The local lenders would advertise the product and put it on sale.
Consumers would buy records and as the in-store supply dropped, the price would increase. The local lenders would make loans and as the supply dwindled, the interest would increase. It was truly a supply and demand system.
Now the vehicle changed from vinyl to cassette to video to compact discs and the distribution remained the same. The money vehicle changed many ways from no doc, 80/20, interest only, etc and the distribution remained the same.
Then, the environment changed.
The music and video industry ran head first into the world wide web. People stopped purchasing records, cassettes, videos and compact discs. Retail stores stopped paying their bills, distributors stopped paying their bills and music companies had to adapt to a new format while trying to resolve the millions of dollars outstanding and unload the tonnage of product that was no longer in demand.
In the mortgage business, people stopped paying. They lost jobs, they owned more home than they could afford or something else happened, but lots of people stopped paying. The mortgage lender had to adapt to a new environment while trying to resolve the millions of dollars outstanding and unload the tonnage of homes that were pledged to secure the notes.
In the music and video industry, mom and pop stores were the first to fold. They were followed by the larger national chains. The product was taken back at pennies on the dollar. Most of it has been relabeled and is being sold off at the wal-marts, etc of the world in discount bins. I am guilty of digging through bins to see what gems are there. I am also occasionally saddened to find something I was delighted to purchase at 13.98 now priced at 2 for $5.
In the mortgage industry, beyond all of the legal haggling that is going on, they have done what any business faced with an abundance of less than desirable product and a growing delinquent account receivable would do. They are slowly trying to sell off the old product at discount prices. They have tightened credit requirements to make sure that any new loans do not join the old. Their strength will be in how many good loans they can create while selling off the assets created by the bad loans.
It will take about ten years to accomplish this. The time table could be accelerated if the government intervened, but the government has enough problems balancing their debt and there is little hope that intervention will occur. The music and video business has been able to change and adapt. It took less time, but then you are dealing with $10 purchases and not $250,000 purchases.
One other difference, the music and video industry contracted and internally needed less people to manage operations. Mortgage firms are faced with handling foreclosures, short sales and new loans with pretty much the same staff size as before. When folks go through the roof and wonder how a “short sale” can take so long to be approved, understand the average case load of one bank representative is 300 different files. There is no real estate agent in any market that can effectively handle 300 listings. It is an overwhelming job and the banks are plowing through as quickly as possible. Until all the dust settles, consumers can expect to need a significant down payment and a better than average credit score to get a loan.
There is not much more I can add except if you happen to be digging through one of those bargain bins, and you happen to come across the 1991 “Girlfriend” album by Matthew Sweet, buy it. It is worth ten fold the $2.50 price tag.