Current Mortgage Market Situation
 
We have arrived.
 
It is now more important than ever for all home buyers and real estate investors to secure financing first and foremost, prior to contract... if any possibility exists of purchasing (or refinancing) a home or property. The financial markets and mortgage industry is incredibly volatile currently, with changes occuring from all sides on a weekly basis.  It really is a historic time for all of us.
 
Although housing and mortgage money in general is in a bit of a debacle, Chicago's housing and mortgage market is much better off than most housing and mortgage markets throughout the rest of the country.  However, there are still obstacles ahead.
 
Just within the last 9 months (the last 3 months dramatically), Fannie Mae, Freddie Mac, investment and retail banks and mortgage insurance companies have felt the market's pressure and substantially tightened guidelines and borrower requirements for mortgage qualification.  Loan-to-value and debt ratio standards are regressing and credit/scoring criteria is rising.  After March 3rd, nearly all mortgage insurance providers will revise credit score requirements upward to a minimum of 620 overall.  For higher leveraging situations (no money down/100% financing, 95% financing etc), 660 will be a floor for purchase and refinance transactions for most MI carriers despite what loan product guidelines indicate.  Seller concessions above 3% will reduce the allowable LTV on many first time buyer programs by the amount of credit incurred.  Reasonable terms on jumbo loans (rates/requirements etc.) are typically capped between $1 and $2 million. Stated income products designed for upper echelon, corporation owners and self-employed types of borrowers (to avoid analyzing hundreds of pages of tax returns), have amost subsided entirely.  City and county program income requirements for low to moderate income earners has recessed whereas personal income and wages have increased consecutively for 5 years running...disqualifying many due to higher salaries.
 
Chicago's biggest hurdle are condominium requirements.  Condo guidelines have changed to the extent of having approximately 1/3rd of  investor pool available now to choose from as was available just a few months ago.  Just for example, Citibank's Citimortgage division completely pulled out of lending 2nd liens and HELOCs in October of 2007 and additionally ceased lending on any and all new construction and new condo conversion projects altogether in Chicago...unless your unit is the last unit sold in the entire project or the project is already on Citi's approved list.  Even language contained within some condominium declarations and bylaws can create non-warrantable status for the condo development and disqualify it for financing altogether...unless the decs/bylaws are amended and re-recorded correctly.  Every investor will require a full project review moving forward.
 
So why is all of this happening?  The "market pressure" indicated in the previous paragraph is a noteworthy culmination of variables, not just
"sub-prime":
 
Initially, the accelerating mortgage default rates were mostly tied into sub-prime and Alt A mortgage products.  Hence, investors taking billions of dollars of losses on these types of CDO's and MBS's no longer would collateralize these products, basically making them unavailable, or, initiated a much higher risk spread premium (rate) for the product to carry it - putting the product out of scope for most borrowers as the money is just too expensive.  So these products have mostly disappeared or have become useless.  These products were generally issued to sub-prime and Alt-A credit borrowers - many of whom would not have qualified for financing according to conforming triple A eligibility requirements.  This default issue was the start of the tightening of credit on the sub-prime side and should have been contained there.  However, upon last year's news of the sub prime debacle, housing started to slow in conjunction with weakening economic conditions and slowdown...and, of course, the investors were watching this.  The consumer was also watching this.  Now add to that...
 
1.  Some of the CDO's were triple A rated and shouldn't have been, hence, A paper CDO's start taking losses.  Now, the sub prime tightening has spread to A paper.  The A paper investors that took minimal or no losses are concerned enough to tighten anyway before any losses are incurred.  Fannie, Freddie, Banks and Investors and MI companies continue to tighten credit requirements, creating much less product availability and very restrictive product availability (comparatively speaking).
 
2.  Consumers who are well qualified to purchase are standing on the sidelines waiting for some kind of foreseeable "bottom" to occur...and many whom are not waiting and trying to purchase, are not closing due to unrealistic offers being presented to sellers (20% - 50% below asking). This is clearly not helping to deplete current inventory of homes on the market and adding to the housing decline in terms of price.
 
3.  The consumers who do want to buy right now and have marginal creditworthiness may not qualify now due to this tightening of credit. Again, this is not helping to deplete the overage of housing inventory and, again, adds to declining prices.
 
4.  The declining prices and increasing inventory are causing further tightening of credit. 
 
5.  This further tightening of credit and declining sales/prices have depleted equity positions in owner's homes.  Now, qualified borrowers who financed 95% or 100% within the last two years cannot capitalize on refinancing to lower mortgage rates is some cases (due to the tighter credit/equity requirements of loan programs).  The sub prime borrowers are subject to the same thing, however, their rates will likely increase when the fixed period ends - putting them in a position of defaulting should they not be able to make the higher payments....and they cannot refinance due to the tightened credit requirements and flat to declining value of their home....which leads to....
 
6.  More defaults, increasing inventory, price declines and/or lack of appreciation, owner's equity depletion, the inability for some to refinance...
 
7.  Furthering the slowing economic conditions due to uncertainty of everthing and less spending;
 
8.  Furthering potential recession, higher jobless claims, inflation at 2.7% and rising (in the short term)...
 
9.  Again, furthering the tightening of credit....
 
10.  And buyers and investors still standing on the sidelines waiting...waiting...waiting......and the cycle continues.
 
The Fed only reaffirmed yesterday and today what was already known by mortgage planners and loan officers in the mortgage banking industry; by indicating in their statements before congressional leaders that this excess tightening of credit will only exacerbate the problem we all face of housing markets potentially worsening before rebounding.  There is no real fix for the problem other than to let it carry through its natural course of action.  Note that the economic stimulus package has no bearing in the Chicago markets.
 
This is all not nearly as bad as it looks on paper.  Chances of recession are minimal and, should one occur, it is likely to be short and timid. Despite oil and food costs being very high currently, inflation through higher CPI, PPI and CPE is likely temporary and in no way representative of the 1970's crisis as some would indicate.  Jobs are reducing to reflect the current slowdown, but still relatively strong.  In all probability, the reduction in workforce will reflect the degree of recession incurred...if such "R word" comes to fruition.  Corporations are cash heavy right now and able to continue forward even in slower economic conditions.  If the housing bust were to spiral completely out of control, legislators and the Fed will likely step in to formulate the necessary solution to ease a massive crisis in housing... should a crisis occur.  FHA would likely be the solution for sub-prime and overtightened credit markets of sorts.
 
Guys, this is absolutely the best time to purchase real estate in 20 years. I purchased a 4 unit foreclosure, 85% rehabbed and only mimimal work needed for 2/3rds ($100K less) of current market value.  There is an overabundance of these types of deals out there.  However, you will not find this kind of deal on new construction or new conversion on the market.  Likely, you will pay within 10% of asking and no less.  Developers for large/new projects are relatively well capitalized and not going to give away property.  The ones who are not well capitalized will ride out the market and get their price or foreclose.  It would be ridiculous to think they could or would sell at cost or a loss and, in their mind, may as well hold onto the property as long as possible anyway if it were going to short sale or foreclosure.  The mortgage market is a bit bumpy but can be navigated through with minimal headaches should you retain an experienced mortgage planner.  Understand however, this is not the time to look for homes first, write a contract and go rate shopping.  There are just too many changes occurring weekly to transact in this fashion.  Retain the professional, secure the financing and the purchase or refinance transaction will ultimately carry through smoothly for everyone.  

- Jon Miller, Chicago Bancorp http://www.chicagomortgagefinance.com