Technology TransactionsLenders Growing Less Jittery About Collateral
Knowing how well home values will hold up in a given market is a key point of knowledge for both sellers and buyers.
Sellers who overprice a home for sale will alienate buyers, frustrate their real estate agent and get left holding the bag.
Buyers who pay too much for a home will suffer immediate equity drain and, perhaps, an "upside down mortgage" should the loan balance exceed the property"s value. Later, if there"s a quick resale, the buyer could lose big.
An overvalued home is a no win situation on both ends of a deal -- that is supposed to be win-win for both parties.
"People have to go beyond price to understand value," says Mike Ela, president of HomeSmartReports.com in San Juan Capistrano.
That"s just what lenders do to manage risk.
In addition to scrutinizing applicants" creditworthiness, income and other lending characteristics, they also examine market character to determine what a property is really worth.
With the help of appraisers and home inspectors, lenders examine property and neighborhood characteristics and local market trends, including flipping, defaults and foreclosure activity.
Ela says, right now, lenders are adjusting to end-of-boom frenzy, a time when sellers often overprice homes and buyers pay too much, based on market conditions that may no longer exist.
"There was a lot of noisy buying and financing activity as people saw the real estate cycle enter its final phase. People really need to do their homework," said Ela.
Lenders did. As a result they have adjusted for what was growing mortgage risk earlier this year caused, in part, by over-inflated prices that weren"t matching values.
Ela"s "Mortgage Risk Levels By State" reveals that the long-predicted tighter lending policies are working to ease that risk and that, in turn, could ease some of the collateral scrutiny that came with the tighter underwriting.
With 1 being the lowest risk score and 100 being the highest, collateral-based risk scores dropped nationwide from 3.27, during the period of August 2005 to January 2006, down to 2.95 during the more recent February to July 2006 period -- a 9.8 percent decline.
"While the market is now settling down, there are still pockets of risky and downright strange market behavior," said Ela.
For example, Wyoming saw a 35.3 percent decline in risk, but Louisiana showed a 38.2 percent risk increase, according to Ela"s risk levels.
Wyoming, one of the destinations in a national reverse migration trend, was an out-migration state in the 1990s, but become an in-migration state, with more people moving in than out beginning in the early 2000s, according to the U.S. Census. It also showed up recently on Ela"s "slam-dunk" list as a state with the second greatest increase in loans quickly approved with the least amount of underwriting scrutiny.
The state was also among the top ten "Most Livable States-2006" list by Lawrence, KS researcher/publisher Morgan Quitno, it has a Community Development Authority recognized by the U.S. Department of Housing and Urban Development for building affordable housing, and during the first quarter this year, the Equality State had the 18th fastest growing rate of home price appreciation among the 50 states and the District of Columbia.
Louisiana, on the other hand, was ground zero for Hurricane Katrina.
Ela said risk has also dropped by double digits in Alaska; Washington, D.C.; Idaho; North Dakota; Rhode Island and West Virginia. Risk has increased likewise in Arkansas; Florida; Hawaii; Michigan; Nebraska; New Hampshire; New Mexico; North Carolina; Pennsylvania; Virginia and Wisconsin.
Ela said several markets in urban Ohio (up 9.5 percent to 15.72) and Michigan (up 29.1 percent to 14.95), the highest statewide risk levels on the list, appear to be particularly exposed to risk.
While some states show a sharp increase in risk levels their risk levels remain relatively low. States with risk levels at or below 2 include Alaska; California; Connecticut; Hawaii; Idaho; Iowa; Massachusetts; Montana; Nevada; New Hampshire; North Dakota; Rhode Island; and Wyoming.
"The fact that, over all, that collateral risk is decreasing means lenders over the last three, six and nine months have done a better job of being vigilant on loan packages. They are having fewer problems," said Ela.
"But keep in mind, the real estate market is a local market. One area could be going gangbusters and other areas could be struggling," he said.