SAN DIEGO -
David Lereah, SVP and chief economist for the National Association of Realtors told attendees of American Credit Union Mortgage Association's annual conference here that the problems in housing are due to "forgetting the fundamentals of sound lending."
Even though credit unions largely have avoided the "exotic" mortgages and subprime mortgages that have gotten other lenders into trouble, NCUA Chairwoman JoAnn Johnson recently told Congress the agency is watching for any "ripple effect."
Learning-And Forgetting
"We learn our limits and then forget them," he said, laying out the short history of real estate boom cycles in 1991, 1993 and 2001-2005, which culminated in the first quarter of 2006.
"Regulators didn't regulate when they should have and so now are overreacting." He said that regulators and Congress will make changes, acknowledging that "they have to be careful, but we don't want to discourage" borrowing for home ownership beyond returning to sound underwriting and limiting easy money to people who clearly have no way to repay large debts.
Lereah said that housing was not in recession, but there is clearly a lot of pain in some markets, particularly the areas where housing appreciated the fastest, like San Francisco, San Diego, Las Vegas and Manhattan.
"This isn't a bubble; bubbles burst. Balloons are a better image because they expand and contract," he said. "We exceeded our limits, that's what happened. It's human nature, everyone likes to make a buck. We bought stocks whose PE ratios were over 100 when we should have known better. We strayed from the fundamentals. Now, everyone is looking for stability; Congress, the regulators, everyone.
He noted similar "refi booms" that occurred in mortgages in the early 1990s, and pointed out that in 1991, total mortgage originations were $400 billion; in 2006 it was $4 trillion.
"So, we increased the mortgage marketplace tenfold in a decade. There were 8.5 million home sales in America last year," Lereach said.
Air Out Of A Balloon
Lereach did offer some encouragment, saying, "We're not going to crash, but we will see a lot of air coming out of the balloon. It really isn't as bad as you may be reading in the media. The media loves to look at the downside of just about everything."
He also noted that market conditions depend on geography, hence his new book title, "All Real Estate is Local."
"The long-term health of housing is good. The worst is over in housing and I'm forecasting a 1% price increase for existing homes. It's only 25% of the country that is experiencing pricing drops. The sector feeling the most pain is new homes. Sales are going down because builders have to sell. Last year, there was a 17% drop in sales of new homes. This year, I think that might drop to 10%. New construction is down and that's what we want; they need to feel the pain a bit," said Lereah.
As inventories fall and negative price corrections, now in the seventh consecutive month, play out, there is opportunity for the credit union industry to make headway.
"Opportunities arise when there are crises," he said. "If we didn't have this problem in the subprime market, I'd be saying that things are in great shape. Interest rates remain relatively low, employment is good and the economy is still growing."
The subprime market is 20% of the sector, and if Interest Only and Negative Amortization and second home loans are added to the mix, Lereah said it would be as much as 50% of the entire mortgage portfolio that would be at risk. Many lenders will develop workouts and forbearance options to help borrowers in resetting mortgages, but changes are coming, he said. "Congress is going to help and Fannie Mae and Freddie Mac will see a mandated increase in loan limits, 228s and 327's will go and low-documentation loans will also be gone."
Foreclosures Not A Crisis
Lereah said the FHA program needs to make a comeback and that many subprime borrowers could go there. "As many as 250,000 high- risk borrowers will be out of the home buying market every year for the next few years. "If you can get some of those borrowers and lend to them responsibly you have a great opportunity. Remember that many are minorities and the government wants to help them become homeowners."
As many as 1.1 million foreclosures are expected this year, he said. "In a true economic recession, that would be a crisis. But lenders will try to work it out with the encouragement of regulators and Congress. It could take two quarters to rid the economy of those foreclosures, and if lenders don't adapt forbearance, it could very well blow up."
Lereah said that in the next 10 years he expects housing to be in good shape. "Conventional wisdom got turned on its head and we needed a cleansing. But Boomers and Boomer children, the second largest population group, are nearing prime earning years." That's when they buy homes.
