Over the last six months, mortgage rates have dropped to record lows while credit remains tight. To understand where rates might go from here and how credit conditions might change, I spoke with Paul Gershkowitz, the Co-owner and President of Greenpark Mortgage. He’s been in the mortgage business for twenty eight years and co-founded the largest privately–held mortgage company in New England before its sale to a Fortune 500 company in 1999.
Paul told me that in his opinion we are in uncharted territory with rates. There is a likelihood rates might drop lower in the near-term but buyers shouldn’t count on that and would be smart to refinance or buy now, if they haven’t already.
He believes there are three keys to the direction of the economy, real estate, and by extension, rates:
- Employment: If we see two consecutive months of non-farm payrolls more than 300,000 than rates will go up.
- Easy Money: In his opinion, the Fed’s actions have created a lot of pent up inflation pressure, and like a spring being wound, this pressure will be released quickly once the employment picture improves. Sovereign governments have also put trillions of dollars into the system and all of this money is sloshing around, waiting for a spark.
- Housing: There is currently a glut of housing. The glut is actually worse than the numbers might show because of shadow inventory. Banks have millions of properties they should have foreclosed on but haven’t because they don’t want to pay to manage and upkeep the properties.
Bottom line: He believes that in the near term rates will remain low or even drop a bit but longer-term, as the economy continues to improve, rates will go up, potentially dramatically.
Getting a Loan
Paul described the mortgage qualification environment as a pendulum, with 10 being easy money and -10 being tight lending conditions. Seven years ago the pendulum was pointing towards 15. Banks were handing out money. Today, the number is at -4. He thinks the conditions are a bit too tight, but not far off. Unlike the boom days, lenders are now carefully examining employment history, income, credit score, past mortgage payments, and savings. They are also relying on credible appraisals.
To get a loan today, you have to show banks you can afford to pay for it. Be prepared to have the proper documentation.
MBS Market Improving
Getting more technical, Paul said that all of this means the Mortgage Backed Securities market is improving, and that may be the hidden story of 2012. The industry must create quality loans and securities that will bring buyers and sovereign governments back to invest in mortgage backed securities. Tighter control on underwriting means better mortgages with more predictable and lower rates of delinquencies and defaults. This is backed up by statistics, which show that the vintage of 2008 – 2012 loans have the highest quality seen in years. That means investors will eventually come in as buyers, replacing the US government and allowing for more growth. Will the pendulum ever get back to a 15 level where credit is too easy and abundant? We hope Never Again, because all that did was to create a huge bubble in real estate that nearly brought the world to its knees. It’s possible that underwriting might loosen a bit more as this process accelerates and the government exits the market.
Overall, he is cautiously optimistic about real estate as an asset class. He believes that an improving economy led by lower unemployment, low to moderately increasing mortgage rates, and the work-down of the real estate inventory glut will largely cancel each others’ effects, resulting in stable, if not slightly increasing real estate values.