VOL. 123 | NO. 10 | Tuesday, January 15, 2008
Year of the 'Tailspin'
By Eric Smith
PLEASE BUY ME!: Homeowners trying to sell homes like this one in the Poplar-Perkins neighborhood of East Memphis were faced with fewer buyers in 2007 because consumer confidence waned amid the subprime fallout and credit crunch. -- Photo By Eric Smith
Like victims of a car accident, mortgage company executives might be checking body parts to make sure everything is intact. That's because 2007 turned into a multi-vehicle pileup for the industry - and not everyone survived.
Non-commercial mortgage filings certainly crashed and burned in Shelby County last year. Just 44,830 mortgages were filed in 2007, down 20.3 percent from 56,219 in 2006, and down 24.2 percent from 59,134 in 2005, according to The Daily News Online, www.memphisdailynews.com.
Non-commercial mortgages include mortgages in which at least one borrower is an individual.
As lenders tightened guidelines to reduce exposure and shed employees to reduce expenses, companies suffered huge losses and some closed shop as a result of the national housing slump.
Too much subprime lending in 2004 and 2005 finally caught up with the industry, resulting in a flurry of foreclosures, which in turn burst many housing bubbles and created a nationwide credit crunch.
Through it all, consumer confidence sank as housing sales plummeted from the record sales pace of 2005 and 2006.
"All of that combined has really thrown the mortgage industry into a tailspin," said Chris Bowers, mortgage loan officer at Bank of America and president of the Memphis Mortgage Bankers Association (MMBA).
Greg Ellenburg, district manager at First Tennessee Home Loans and MMBA secretary-treasurer, agreed that 2007 turned nightmarish because of a number of factors converging at exactly the right time.
"Consumer confidence definitely dropped in '07, but clearly the market was impacted by the subprime debacle and foreclosures," he said. "It's kind of a spiral, and they feed off each other: Consumer confidence drops, and then you end up with people who aren't buying, and then you get foreclosures and property values drop. It's a combination of it all."
While the housing woes in Shelby County didn't match those elsewhere, particularly on either coast, the numbers here are eye-opening.
In 2007, every month but one (January, with a 4.5 percent increase) fell shy of the previous year's mark, according to The Daily News Online. And of the 11 months that saw a decline in mortgage filings from 2006, all but one (April, with a 3.9 percent decrease) suffered double-digit dropoffs.
The losses were most severe during the fourth quarter, escalating as the year came to a close. October, November and December suffered declines of 28 percent, 36 percent and 44.2 percent, respectively, from the same months in 2006. Toss in August's 20.3 percent and September's 31.4 percent declines, and it's easy to see that 2007 got much worse as the year wore on.
The struggles of builders and mortgage companies made headlines daily in Memphis and nationwide, and many companies' struggles carried over into the new year.
Since late 2006, when the first signs of this trend appeared, 214 mortgage companies have gone under, according to The Mortgage Lender Implode-O-Meter (ml-implode.com), a Web site run by Las Vegas-based Krowne Concepts Inc., which tracks the industry.
Last week, Bank of America Corp. bought the embattled Countrywide Financial Corp. - perhaps the poster child of this mortgage mess - in a $4 billion blockbuster deal.
Not everyone felt the pinch, however. Some lenders prospered in 2007 by taking up slack from shuttered mortgage companies.
"We're picking up some of their market share, but sales focus right now for all of us in the industry is a critical thing," Ellenburg said. "Now you get situations where the Realtors and the borrowers themselves want to do business with people they know are going to be here next year and years down the road. They're looking for more stable companies."
Bowers called this picking up of new business a "flight to quality," and it showed in the list of Shelby County's top residential lenders for 2007 as tracked by real estate information company Chandler Reports.
Wells Fargo Ltd. led the way in Shelby County with $139.4 million coming from 742 loans, according to Chandler Reports. It was followed by Countrywide Home Loans ($137.5 million, 750 loans); Bank of America ($123.3 million, 926); Cordova-based Community Mortgage Corp. ($100.2 million, 602); and SunTrust Mortgage Inc. ($99.7 million, 603).
"People that were in the business to look for mortgages went to the place where it was safe," Bowers said. "We picked up folks. Wachovia, First Tennessee, SunTrust, a lot of us picked up business that wasn't there before."
Not horrible for everyone
Delta Trust Mortgage Corp. is much smaller than institutions such as Bank of America and First Tennessee, but the Cordova-based company had one of its best years ever in 2007.
"We've benefited from the fact that the market has contracted, and we've seen some players go away," said Delta Trust president West Beibers. "We saw some players drop out of the market in 2007, and when that occurred it left us a larger share of the pie, so to speak."
Moreover, Beibers said a secret was keeping away from the excessive subprime products to begin with.
"The business we concentrate on has been ongoing standard business," he said. "The business that we've always done is still there. People still buy and sell houses."
The problem, of course, is that many perceive the home loan process has been tightened so much that it's nearly impossible to secure a loan. That's not true, lenders say.
"We're closing loans today at 100 percent loan-to-values for people who don't necessarily have perfect credit," Beibers said. "Now, if you're looking for a 100 percent loan-to-value, no-doc(umentation) loan, you're not going to get it. That's gone."
But the traditional loans for borrowers in good standing are very much available - and very much affordable thanks to low rates.
"We've seen some tightening on what I would call the fringes, but if your credit is good and we can verify your income, nothing's really changed," Beibers said.
Plumbing the dregs
What has changed, however, is the viability of markets in places like California and Florida, where values skyrocketed and then sank, creating a dangerously large inventory of homes and dangerously tight availability of credit.
Could that scenario trickle down to Memphis?
"The concern that I have is in tightening the guidelines to wring out the excesses that took place in those markets; are we going to throw out markets like Memphis, Dallas, St. Louis ... middle-tier, average markets?" Beibers said. "So far, we haven't seen it yet. We are seeing some things if they are taken to an extreme they could be a problem. There's been nothing that we've been too alarmed over."
One alarming statistic is the 1.4 million foreclosures expected in 2008 nationwide. That's why the federal government asked the mortgage industry to implement a five-year freeze on rates for a portion of the roughly 2 million subprime loans nationwide scheduled to reset to higher rates over the next two years.
The move is designed to prevent homeowners from going into default if their payments climb too high, the scenario that creates foreclosures. Will it be enough to avoid another catastrophe? Only time will tell.
"There is still some pain to be felt; there's some correction that has to be made," Bowers said. "But overall, have we hit bottom or are we close to bottom and maybe making a turn up? I think we're probably pretty close."