Housing under pressure - lackluster performance despite improved economic conditions

Nation's Business, Dec, 1985

Housing Under Pressure Contractors and their suppliers, mortgage bankers and many first-time home buyers are finding that low inflation and falling interest rates are not the panacea many expected.

Though the overall economy will rebound next year, the housing industry may continue a 1985 performance many industry leaders describe as below par. The 1.32 million housing units started in the first nine months of 1985 represented a 4 percent drop from the same period last year, even though the average 12.25 percent mortgage interest rate is the lowest in six years.

Ronald F. Poe, president of the Mortgage Bankers Association of america and chief executive of Dorman & Wilson, a White Plains, N.Y., mortgage banking company, says a hoped-for housing boom has not occurred because many lenders are tightening their underwriting standards. He blames that on an increase of mortgage delinquencies and foreclosures.

Lenders can reduce future losses by requiring larger down payments and by demanding that borrowers have more income. Therefore, tighter credit standards have the effect of shrinking the pool of borrowers qualified for mortgages at a given rate of interest. As a result, the increased sales many builders anticipated have not materialized, despite lower interest rates.

Industry officials say several factors are to blame for the bad loans. In some cases, adjustable rate mortgage payments are rising faster than incomes. It is not uncommon for adjustable rate mortgages to have monthly payments 20 percent above the original terms. Those payments were negotiated in the early 1980s, when interest rates were sky-high and it seemd that hyper-inflation was here to stay.

In some areas, homeowners unable to meet payments accept foreclosure rather than sell their property because a drop in resale prices has made it worth less than the outstanding mortgage.

The hardest hit areas are in states in which a major industry is suffering, such as the forest products industry in Oregon, the Texas oil and gas industry and the steel industry in western Pennsylvania. Other states the Mortgage Bankers Association says have pockets of bad loans include California, Michigan, Illinois, Florida, Oklahoma, Colorado, Indiana and Arizona.

One major mortgage lender in the Southeastern states, Charlotte, N.C.-based Cameron-Brown Company, says that tighter underwriting criteria will have an effect similar to that of adding two percentage points to the average interest rate on a mortgage. The down payment and income required to qualify for a given rate of interest is going up, and many borrowers will find themselves in categories carrying higher rates.

Those tougher guidelines will hit first-time home buyers especially hard because they generally have less cash and smaller incomes than do borrowers who already are homeowners. Under the new guidelines, a buyer now able to afford a $60,000 house will need 12 percent more income to qualify for a loan on that same house.

Well-heeled home buyers are also feeling the pinch, in at least one respect--mortgage insurance is getting more expensive. This insurance guarantees payment in the event of borrower default, and many lenders now require it on vacation homes and more costly houses. First year rates for mortgage insurance have recently risen 25 percent. It is also harder to get such insurance. Insurers are paying closer attention to the underlying value of the insured property.

Thomas M. French, Jr., Bank of Boston director of mortgage banking, says low inflation in property values means that lenders can no longer depend on the appreciating value of a house to protect their investment. Inflation can no longer be counted on to bail out most problem loans, French says.

Lyle Gramley, the Mortgage Banking Association chief economist, who until recently was a Federal Reserve Board governor, says that housing prices, "show no signs of a substantial upturn in the future." He says that consumers' attitudes signal a continuation of current expectations of low inflation.