I read an interesting report this morning written by an analyst who has actually put some thought into the aftermath of the subprime implosion. By his calculations, the subprime firms who have gone out of business generated approximately $280 billion of loans last year, a little more than 9% of all loans funded. The combination of these firms going out of business and tightened lending standards are creating a void in the amount of mortgage backed securities that were issued using these loans as collateral. Investors who purchased these securities will now have to look elsewhere for investments and borrowers will need to search for alternative financing. Many of these borrowers could end up in FHA or VA loans, except of course in high cost areas, and still others may choose the FNMA or FHLMC programs targeted to low income or credit impaired borrowers. So, while the no down payment, stated income, poor credit loans are gone, there are still alternatives available for the average home purchase.
The greatest concern is for the borrower with average credit looking to qualify in high cost areas such as CA, FL, NY. Even with six figure incomes we are finding that 100% programs are disappearing rapidly. The most aggressive programs are requiring clients to put at least 5-10% down. Many potential home buyers that have come out of hibernation are finding that they don't meet the new lending requirements. The smart ones are working on plans to save for down payments. The median priced home in Los Angeles last quarter was 586K. With 5% down and six months of reserves, the average borrower has to squirrel away over 50k and have an income of 150k to buy the average home on a standard 30Y fixed. As you can see, millions of potential buyers are unable to qualify under the current lending guidelines with the enormous run up in home prices. What does this do to the price of housing on the market? That sound that you heard earlier is the air rapidly escaping from the housing bubble.
