Illinois Mortgage Rates and News

2007 is almost over. Good riddance. It’s been a turbulent, crazy, chaotic year in the real estate and mortgage industry. This was the year when it all hit the fan.

• The real estate market slowed down and home prices stagnated or fell.
• The sub prime mortgage sector imploded and hundreds of wholesale lenders went out of business.
• The sub prime virus became a credit crunch, infecting the biggest conforming mortgage lenders. One top 10 mortgage lender bit the dust, and some of the biggest names hung on by the skin of their teeth.
• The costs of getting a mortgage went up, especially for those with good, but not great credit .
• The cost of a Jumbo loan moved up sharply and still hasn’t recovered .
• We saw a return to more traditional underwriting. Income verification is now the norm. Good credit  and down payments are now expected, too.
• Foreclosures and loan defaults spiked, especially in the areas which saw the highest home price increases.

I’ve been an Illinois mortgage lender for 16 years now, and I’ve never seen a year like this. Historically the closest comparison was back in the 80s when the Savings and Loans crisis shook up the mortgage industry, led to a regional recession, a spike in foreclosures and opened the door for mortgage brokers to expand their business. We still don’t know what the long term affects of this melt down will be, but we know the fallout will continue through the new year.

Our economy is a lot like a big Rube Goldberg Machine. One action impacts on another and sets off a chain reaction which leads in a very complicated, round-about way to the end result. You take away one element and the machine won’t work. Consumer spending has long been the driving engine of our economy. What will happen if the housing crunch causes consumers to slow spending down by a lot? How will the rest of our economy react?

There are a lot of unknowns as we go into the new year, and the future is far from clear. I expect that this will be a slower year as the housing problems continue to unwind. But I do see some bright spots and reasons for optimism, too. Putting on my fortune teller hat, here are a few things that I expect to happen over the course of 2008.

1. People will continue to buy homes. Here in Illinois, especially in the Chicago area, the economy is diverse and there is pent up demand for homes. This year, even with all the problems, was the fifth highest year on record for home sales. The market will continue to be soft, but many home buyers will get off the fence and take advantage of bargains.
2. Interest rates will drop. The Fed is in a tough situation. They are walking a wire with inflation on one side and a recession on the other. As the overall economy softens the greater risk will be on the recession side. I expect that we will see lower mortgage interest rates over the course of this year.
3. Conventional mortgage guidelines will continue to tighten. All the major parties in the real estate market are under pressure from mistakes they made during the boom years. Fannie Mae and Freddie Mac have already tightened considerably over the last months, but they will go further, shutting credit off to many borrowers who used to be looked at as great risks. They were looking at opportunity then, they are looking at risk now. Chances are they will go to far in their tightening, making conventional mortgages tougher to qualify for.
4. FHA and Government Bond programs will take up some of the slack. The Senate passed the FHA modernization bill this month which will lower the down payment required from 3% to 0 down in some cases, and raise the loan limits up to the conventional limit ($417,000). This bill passed the House earlier, and it is expected that a reconciled bill will become law sometime after the first of the year. First time home buyer bond programs like the City of Chicago Bond Program and the State of Illinois Mortgage Bond Program will also fill a niche and help keep homes affordable for first time home buyers.
5. Option A.R.M.s will be the next problem area. About 20% of mortgages originated last year were option arms, which start at an artificially low payment rate but the true rate accrues on the back end, increasing the mortgage balance. Many borrowers took on these loans with out understanding how they work. With their minimum payments low they haven’t caused the payment shock that has been such a problem with sub prime loans, but in areas where home values are deteriorating this will become a real problem.
6. The Government will legislate cures that won’t help and may make things worse. We’ve already seen this in Illinois and there are proposed bills in congress. Predatory lending is a problem, but many of the proposed bills would make it harder for people to qualify, making the problem worse.
7. Real estate will continue to be a local phenomenon. Some markets will continue to decline, others will muddle through without much pain. The recent Case Schiller housing report showed many areas with double digit declines in home prices, but other areas where prices were flat. Chicago, and much of the Midwest, didn’t have the wild upward swings in pricing that some areas saw, and it is likely that it won’t see the sharp declines.

This year has been a time of big changes and we it’s guaranteed we will see more changes as we go forward. In hindsight the problems in the real estate market were glaring and we should have seen them coming. I know myself that a lot of the loans we were doing didn’t make sense in a traditional sense, but I never expected the year to turn out like it did. We will see what the coming year brings. Any opinions on what to expect?

Illinois Mortgage Rates and News

Peter Thompson is illinois Mortgage Broker



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Tags: 2007 year in review, first time home buyer, Illinois mortgage, interest rates, mortgage, predictions for 2008

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