What Credit Crunch? (guest commentary by Scott McElmurry)

Foreclosures, sub-prime loans, home price depreciation – just turn on the news and you will hear how our nation is reeling from problems in the real estate industry, right? And now there’s a new wrinkle: there’s a credit crunch or, essentially, no money to loan.

Well, let’s get realistic, because that’s just not the case for the majority of Americans in the market for home loans. In fact, now may be the best time for prospective homeowners to buy.

Now, it’s true that many lenders have closed their doors or filed for bankruptcy protection recently, mostly due to “Alt-A” loans. Alt-A loans are used for the most part when the borrower has good credit, but did not supply evidence of income. This type of loan is commonly referred to as a “stated income” or “no doc” loan. Like most mortgage loans, Alt-A loans are sold to investors on the secondary market. 

However, Alt-A loans are not sold to Fannie Mae or Freddie Mac; they are purchased and pooled by investment banks, private equity firms, hedge funds, etc. The default scare caused by the sub-prime loan meltdown caused these “investors” to cease purchasing any of the Alt-A loans. Consequently, many lenders that were heavily invested in Alt-A loans paid the price. Again, that’s been widely reported.

The remaining lenders are navigating the changing landscape, and for the most part, it’s business as usual. Because more than 80 percent of the loans done nationally are “prime” loans (sold eventually to Fannie Mae or Freddie Mac), the credit crunch or liquidity problems are having little effect on the majority of those seeking mortgage financing.

For example, fewer than 3 percent of the loans originated by our company during the last year were of the Alt-A variety. Many of central Arkansas’ mortgage companies are approved to sell loans directly to Fannie Mae or Freddie Mac and therefore are not negatively affected in the long term if a company they were selling loans to goes under. Although many reports are showing a slowdown in home sales for 2007, reports prepared for the first four months of 2007 show new mortgage volume in Pulaski County is up 18 percent from the same period in 2006. 

Foreclosures are on the rise in the United States, but that rise is primarily associated with four states, where sub-prime lending was a much larger piece of the market than in Arkansas. Those states are also the same states where price appreciation in 2005 and 2006 was at unsustainable levels, causing much speculation in real estate. Those markets are now experiencing home price declines. Central Arkansas has not experienced this phenomenon. In fact, July 2007 foreclosure numbers in the state of Arkansas were virtually the same as those for June 2005, a time when the market was good. 

Those affected by the “credit crunch” are borrowers who cannot prove they can make the proposed mortgage payment. Most stated income or no doc loans are being phased out or discontinued altogether. Government agencies continue to monitor default percentages, and if those rise, underwriting standards may be tightened accordingly. But default rates, which drive changes to underwriting standards, are currently still at good levels as they pertain to the loans the majority of Americans obtain. 

For the vast majority of homebuyers who have decent credit and can prove their income is sufficient to service their debt, loans are readily available. Mortgage rates are creeping down to below 6 percent for a 30-year, fixed-rate loan, and the real estate market in central Arkansas is currently buyer-friendly.

The bottom line is the national situation is having little effect on mortgage business in central Arkansas. Lenders have money to loan and it’s business as usual. The sign still reads, “Seeking qualified applicants, apply within.”

(Scott McElmurry is the executive vice president and COO of Bank of Little Rock Mortgage. He may be reached at [email protected].)