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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