Mortgage Companies in Trouble
Consumers Will Ultimately Pay Higher Fees and Interest Rates
More negative mortgage company news emerged today with American Home Mortgage’s earnings dropping 43%. This drop can be attributed to a drop in new mortgages, a slowdown in the housing market, and negative exposure to the subprime lending market. Expect American Home Mortgage to be one of many mortgage companies coming short of earnings or adjusting their guidance downward.
Where Is the Mortgage Industry Going Next?
This is the most important question for consumers who are interested in buying new homes or thinking about refinancing. Unfortunately, the outlook is not good for a combination of reasons. First, interest rates are on the rise and interest rates spreads are small. With rising interest rates, refinancing to better loan products will be tough. For those buyers that are forced to refinance they will see higher rates and even more fees.
Interest Rates and Spreads
Tight interest rate spreads mean banks will be making less money on each loan. Look for higher fees and more loan points to make up this difference. New borrowers should be very vigilant around loan costs. Ask for an approximated closing statement upfront and be prepared to argue over unnecessary fees. Consumers can only hope for some help from the Federal Reserve, by lowering their Fed Funds Rate. This could help ease the burden of the consumer and take some heat off of lenders.
Increased Lending Regulations
In addition to smaller profit margins, lenders will be facing significant scrutiny over their lending and foreclosure costs. This will add more cost into the process. On the foreclosure side, Congress and the Fed have expressed deep concern over the subprime lending fallout. They have encouraged banks to actively seek to help borrowers in default or delinquency. This climate will make it harder for banks to foreclose on properties and increase their bad debt expenses.
Again, some of this will eventually get passed on to the consumer. While consumers in default or delinquency will be helped by these new regulations, new borrowers will have to pay a premium because banks are providing these additional services.
Investment Opportunities
Although consumers will see higher interest rates and fees going forward, the current mortgage company presents an interesting investment opportunity. Investors should consider selling this industry short. For those of you who are unfamiliar with this concept, short selling is selling something before you buy it. A good example of this is new construction sells. Many speculators reserve a lot or home in a new construction area for a set price and then sell this reservation at a later date if the project goes up in value.
The best advice for consumers in the market for a new mortgage would be to buy now. The mortgage industry will only get worse before it gets better. Avoid paying higher prices and getting higher interest rates by getting your mortgage locked in now.
