The bust of the subprime mortgage industry may be a boom for rental property investors.  The rental market in DFW has been depressed for years as interest rates dropped to historical lows and renters turned to buyers.

The populatiry of subprime lending over the last few years didn’t help the rental market as would-be renters with low credit scores and no money down were able to purchase homes.  Of course many of those purchases will be forclosures in the coming years, but that is a different story.

According to this recent article in the Fort Worth Star Telegram, the subprime lending market has dried up.  This will be a boom for rental investors as these would-be subprime purchasers are now renters again.

In blink of an eye, credit no longer so easy
By ANDREA JARES
Star-Telegram staff writer

S-T/IAN McVEA
Paul Peebles of Old Capital Lending in Southlake has had to turn away many prospective buyers. Paul Peebles, senior loan officer at Old Capital Lending in Southlake, used to offer a variety of mortgage loans.

There were loans for people with shaky credit or too much debt. Loans for self-employed people who didn’t have a regular paycheck. And loans for people with little available for a down payment.

But in recent months — especially the last two weeks — he has had to turn away many prospective borrowers, unless they wanted a traditional fixed-rate note and had a chunk of money for a down payment.

Home buyers looking for more exotic loans will have to keep on shopping. But Peebles figures that they aren’t having much luck elsewhere.

“I sell what everybody else sells,” Peebles said. “We all get our money from the same sources.”

Mortgage funding has been tightening up, hobbling what had been unbridled growth in the housing market in recent years. And since the end of July, the flow of capital between borrowers on Main Street and big-time lenders on Wall Street has gotten downright congested.

This month, the housing crunch became an issue on Wall Street, as rising foreclosures and defaults on subprime mortgages sank the value of hedge-fund investments and launched a stock sell-off. Investors have grown leery of securities backed by subprime mortgages, drying up a ready source of cash for lenders.

“They just don’t have a taste for the subprime and Alt-A loans,” Peebles said, referring to mortgage loans for borrowers with low credit scores.

The resulting credit squeeze has driven many mortgage companies out of business.

A Web site called www.ml-implode.com manages the “Mortgage Lender Implode-O-Meter,” which counted 116 failed mortgage companies as of Friday, adding two since Wednesday. Fourteen more were on the ailing list, although the site notes that “most of the industry now falls under this description.”

The recent havoc in the mortgage markets is particularly shocking to people in the industry because of the size of the companies that have fallen, as well as the sheer speed with which it has happened.

American Home Mortgage Investment Corp., one of the largest secondary mortgage lenders in the country, announced Aug. 2 that it had stopped taking mortgage applications and would lay off about 7,000 employees the next day. Four days later it filed for Chapter 11 bankruptcy protection.

“It happened in literally a week and a half’s time,” said Chad Bates, president of Legacy Financial Group in Arlington, adding that the company had an excellent reputation. “They are an example of a company that wasn’t doing subprime-type loans, but they were doing a lot of adjustable-rate mortgages, and the value of that portfolio went down, creating the margin calls that they could not meet.”

The trouble among secondary lenders is making it hard for mortgage brokers to strike deals with subprime borrowers they would have happily loaned money to only a few months ago.

“We have products pulled off the market on a daily basis,” Bates said. “I’ve been in banking since 1979, and I’ve never seen anything like it.”

That sentiment is shared by Barry Habib, chief executive of the Mortgage Market Guide, an information service based in New Jersey.

“We’re going through history right now,” he said. “Never in history have we seen a liquidity crunch happen like this.”

He notes that over the next 30 days, a lot of adjustments will occur as loan commitments already sold work through the system.

“It’s going to get worse before it gets better,” Habib said.

Many nontraditional mortgage loans are no longer available, including loans for more than the home’s value and loans with little or no proof of finances, known as “no-doc” or “low-doc.” Many lenders now require down payments of 5 percent to 10 percent and higher credit scores — shutting out many people who would have qualified before, said Darryl Moree, broker at Family1stHome.com in Arlington.

“The market has totally changed,” he said. Before the recent tightening, he said, he could sell three or four people a mortgage for every 10 who contacted his office. Today it’s more like three mortgages for every 20 contacts.

Borrowers now need to have credit scores of about 640 or higher and bring more cash to the closing table.

“I don’t want people to think that they can’t find any loans anymore,” Bates said. “There are a lot of products if they clean up their credit or have significant money to put down as a down payment.

“We still even have core Fannie Mae products that offer up to 100 percent financing for purchases.”

The squeeze in loan availability could spell trouble for homeowners who have adjustable-rate mortgages that they had hoped to refinance. If those homeowners don’t get a new loan before the rate adjusts upward, their home suddenly gets more expensive — sometimes so expensive that they can no longer afford the payments. Foreclosures could spike.

“I fully expect them to be reacting in December as we move into the holidays,” Moree said.

The mortgage meltdown also affects homeowners and builders who are trying to sell houses. Tighter restrictions on mortgage loans leaves fewer people available to buy homes.

Real estate market watchers say existing-home sales are already being affected by the lending squeeze. Home sales over the past six months have been down from last year in the 29-county North Texas area tracked by the North Texas Real Estate Information System.

Executives with Fort Worth-based D.R. Horton said in their quarterly earnings call in July that tightening mortgage standards were making financing more difficult.

“In some instances across the country, we’re trying to qualify the same buyer two and three times, based upon the changing conditions in the marketplace,” Chief Executive Donald Tomnitz said.

As the housing market goes, so goes a good chunk of the local economy, notes Moree. If people are not buying houses, they’re not shopping at the hardware store, signing up for pest control and other rites of homeownership.

ajares@star-telegram.com
Andrea Jares, 817-548-5522

Maybe it’s time for you to think about jumping back into the rental market!