Mortgage Melee

High unemployment stifles the refinancing market

Back Longreads Nov 1, 2010 By Josh Brodesky

It should be the perfect prescription for an ailing housing market, but so far few buyers are taking it.

Housing prices have dropped in the River City by hundreds of thousands of dollars since the go-go days of 2006. Interest rates are hovering at historic lows — 4 percent.

But buyers are still hard to come by, and that’s going to spell a long, slow recovery for the Capital Region.

There might be great deals out there, but credit is tight, consumer confidence is low and unemployment looms as thick as the valley’s summertime smog.

With unemployment sitting at more than 12 percent for the Sacramento metro area, low prices and cheap credit mean very little. There are only so many buyers who can take advantage of that combo, and far too many distressed homes flooding the market. Sacramento housing is marked by a tension between great opportunities and few people able and willing to take them.

“I think we could sit with home prices being flat for quite some time to come,” says Harry L. Duncan, president of Vitek Mortgage Group, a Sacramento-based mortgage bank. “It could be three to four years until the unemployment issue is worked out. It’s really hard to get a sense that home prices will rise.”

Talk about flat.

The median price of a home in Sacramento in August was $186,000, according to MLS statistics from the Sacramento Association of Realtors. In July, it was $185,000, and a year ago it was $190,000.

Unemployment, or a fear of future unemployment, keeps some buyers from making a move in this market. Super tight credit conditions also force potential buyers to the sidelines.

Big aggregators for loans such as Wells Fargo and Bank of America — major banks that buy loans from companies like Vitek to sell in the secondary market — have set rigid credit guidelines, overcompensating in a down market.

Duncan gave the example of a Federal Housing Administration loan, which is often used by first-time buyers with modest means. A qualified FHA borrower only has to put 3.5 percent down, and credit scores can be as low as 580.

But the major banks won’t take a credit score under 620, and that leaves many potential homebuyers in the cold. The average credit score for an FHA loan is 700 these days, Duncan says. As for a conventional loan? The average score is 765.

“It’s an ultraconservative approach to business, which is keeping a lot of potential buyers out of the market,” Duncan says.

So buyers with a few dings on their credit — who might easily have qualified for junk loans during the boom — are missing out on a market that is flush with inventory and marked by affordability. It’s a sad twist, really, of the housing crisis.

In some ways, the same dynamics are at play in the refinance business. Duncan says low interest rates have spurred a “quiet boom,” but even that is limited by distress.

According to the real estate analytics firm CoreLogic, roughly 45 percent of homeowners in the Sacramento/Arden-Arcade/Roseville market owed more than their properties were worth. That’s not only a sign of potential foreclosure, but it makes it very difficult to take advantage of low interest rates.

“It’s certainly one of the quietest refinance booms that we’ve ever experienced,” Duncan says. “A lot of it has to do with equity. A lot of people would like to refinance but don’t have the equity to do it. It’s really only the high-quality borrowers.”

Still, several mortgage bankers in the Sacramento area say refinancing has become the bulk of their business.

“We’ve expanded our production quite a bit,” says Steve Hops, chairman of the California Mortgage Bankers Association. “The ratio of purchase to refinance was 85 to 15 (percent) as late as May, and now we are running at 50 percent refinance business.

“So the purchase business isn’t necessarily down, but there has been an awful lot of new refinance business to hit the books.”

Hops says local housing markets vary by community and even neighborhood, but he characterizes the general market as lacking confidence coupled with chronic unemployment.

While houses across California were being flipped with little concern about leverage when the market was hot — after all, buyers could always refinance or sell — today’s buyer is looking for a place to call home and is concerned about jobs.

“People at this point aren’t banking on buying a house and having a value go up right away,” Hops says. “The vast majority of homebuyers right now are just looking for a dwelling. What they need, however, is confidence. … We have to build a pyramid of confidence that starts with more jobs, and as more jobs come into the economy, people get more confident and that builds on itself.”

So with huge obstacles in the housing market, just who is buying? The answer appears to be first-time homebuyers and large investment groups.

Hayes Barnard of Paramount Equity Mortgage says his company saw a surge in refinancing after the housing tax credit expired. Only about one-fifth of Paramount’s business has been home sales in recent months, and most of those buyers have been first-timers.

Move-up buyers are almost nonexistent — because they would have to sell their homes — and investors make up a small sliver of the market because they usually operate in cash.

With the tax credit now expired, and credit tight, Barnard doesn’t see a lot of new buyers.

In the first quarter of this year, roughly 45 percent of homeowners in the Sacramento metro area owed more than their properties were worth, according to real estate analytics firm CoreLogic.

“How is it going to grow, and where is it going to come from? I don’t really see it coming from the first-time homebuyer,” he says.

Barnard says he expects large investment groups to be more active. In the past two years, he’s seen these groups get more active in the Sacramento market, and he is working with one investment group that will be “buying 1,000 homes in the Sacramento area over the next couple months.”

So where are people buying?

Prices across the Sacramento region have largely stabilized, with only slight year-over-year declines, according to’s neighborhood report and CoreLogic’s market report.

Some lenders say interest in West Sacramento has remained strong, and there’s a feeling that prices there have bottomed. Meanwhile, Barnard says Paramount is generating a healthy number of loans for the Roseville, Rocklin and Granite Bay areas.

But with every downturn comes opportunity to gain market share.

When Mark A. Lund opened Community 1st Bank in Placer County in February 2006, he knew the housing market was overheated. He thought home prices would come down by maybe 25 percent — instead of the 40 to 50 percent the region has seen — so to avoid getting caught in the meltdown he wouldn’t do any mortgage or construction lending.

“I believe that the fact that we made that decision is why we are alive and kicking today,” Lund says.

Community 1st Bank has three branches, and in September it opened up a home mortgage center for residential lending. Despite the Great Recession, Community 1st Bank has a solid rating of three stars from Florida-based Bauer Financial, which rates banks and credit unions for consumers.

In some ways the move goes against the grain of a lending market that has seen intense consolidation in the downturn.

Many mortgage brokers no longer have access to credit, making it difficult to turn around competitive loans quickly. So they are either closing shop or being consolidated into larger mortgage banks. Paramount, for example, was in the process of acquiring another company in October.

Meanwhile all mortgage lenders are now required to be licensed and join a national registry that will allow regulators to track loans.

But in this changing landscape marked by consolidation, Lund sees opportunity. He sees less competition and safer underwriting. His bank is established in the community now and has a strong base of support.

“We verify everything: income-to-debt ratio [and] W-2s. You have to qualify based on your income and your debt,” Lund says. “It’s back to the old world, and a lot of lenders have gone away.”

Looking into his proverbial crystal ball, Lund says he isn’t sure Sacramento’s housing market has hit bottom, but he also says the market has fallen so far that from a consumer’s perspective it really doesn’t matter.

“I don’t know if we are at the bottom, but I don’t know it if matters that we are at the bottom. What matters is if we are close to the bottom,” he says. “I think it’s going to take a few more years to absorb the inventory that’s out there.”

Lund also says he expects the market (at some point several years from now) to surge as prices start to increase again and the herd mentality takes over among consumers.

Until then, the Sacramento region is stacked with inventory. Foreclosures and short sales define the market, and there appears to be no letup in sight. Distressed sales make up nearly two-thirds of the market, according to the Sacramento Association of Realtors’ August report.

The inventory situation is a huge source of concern for Doug Covill, president-elect of the Sacramento Association of Realtors.

He’s watched as the mortgage crisis has evolved from a lending crisis to an unemployment crisis, and he sees no end in sight for distressed homes coming on the market.

“There are still a whole bunch of distressed properties that haven’t even been put on the market yet,” he says. “All those other houses concern me.”

The Sacramento Association of Realtors’ August report shows about 3.5 months of inventory on the market, but that number can be misleading because banks have held off putting foreclosures on the market or even pursuing foreclosure on homeowners in default.

Covill marveled at the low interest rates and prices, saying he hopes they would lure potential buyers. But with so many distressed homes coming on the market, unemployment stuck around 12 percent and credit so tight, he just doesn’t see many buyers around.

“Last year, maybe the first part of this year, stuff was pretty much flying off the shelf, and now it’s kind of slowed up. I think the tax credit has something to do with that,” he says, referring to the $8,000 federal tax credit for first-time homebuyers, which expired in June.

“I think people are just getting scared,” he says. “They are worried about their jobs. Buyers’ confidence is probably low, so if you are fearing furloughs and layoffs, do you want to go out and buy a home?”

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