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Where We Are Today

This week’s post is the second and final part of series started last week. Last week’s topic was entitled, How Did We Get Here and it explored a period of time that starts in 2001 – the beginning of the modern mortgage industry – to 2007 – the peak of the housing bubble. The week, as the title suggests, I will talk about where we are today.

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Investor Demand Drops

As home prices fell and the mortgage-delinquencies and foreclosures rose, investors saw the major losses in their mortgage-based investments. This led to a sharp decline in demand for those mortgage-based investments through the world. Because of this, mortgage origination projections for 2008 are $1.9 trillion, down over 50% from a high point of $3.9 trillion in 2003.

Mortgage Lending Standards Tighten

As a reaction to rising credit investment losses, the lending standards are returning to more prudent levels. The tightening of these standards coupled with the reduced equity from falling home prices in some markets has greatly limited the number of qualified new home buyers and refinance opportunities for current homeowners.

Borrowing Power Decreases

The tightening of mortgage standards has also impacted borrowing power. As you may have guessed, the low- and no-doc options mentioned last week are no longer available. Recently, the typical borrower’s buying power has dropped sharply; some say as much as 50% from it’s peak in early 2007.

Home Prices Fall

Prices of existing homes continue to soften in many markets. Foreclosures have risen, and home sales are falling leading to excess surplus in the housing inventories.

To return to the trended growth rate of 1.4 percent, home prices must decrease an average of 34 percent from their peak reached in early 2007.

Additionally, it’s projected that housing prices must return to or fall below 2.6 times the median income level.

When Will the Market Stabilize?

Given the fluid nature of the values and the external influencing factors of the mortgage industry – regulations, interest rates, economic conditions, availability of credit, etc. – to pinpoint an exact timing for the industry to reach the bottom of this cycle (not crisis, but cycle) is more of an art than a science.

The best forecasting calls for the restoration of equilibrium to the mortgage industry in the first half of 2010. However, pending government intervention may impact the timeline for the return of stability to the market as well as to investor confidence much sooner than that.

A special thanks to T2 Partners Management LP ( and JP Morgan Chase and Company ( for the data that was used for this blog entry.

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