Real Estate Refuge--State Housing Market Safer than Most

West Virginia Gazette
By Joe MorrisStaff writer

As with twisters and hurricanes, West Virginia appears to be sheltered from the eye of the storm buffeting the nation’s mortgage markets, but that doesn’t mean it won’t get rained on.
Mortgage banks have been cutting back drastically on lending amid a rise in defaults on risky loans and an exodus of investors from the credit markets. The Dow Jones Industrial Average fell more than 1 percent for the week, dragged down by the stocks of banks, homebuilders and other companies connected to the mortgage industry.

There are, of course, plenty of banks and homebuilders in West Virginia, but they haven’t been basking in the mortgage boom of the past decade as much as states like Florida and California, and therefore they won’t come crashing down as hard, says state Banking Commissioner Larry Stark.

“Where the increases have been large, the correction will be large,” says Stark. “We haven’t seen the large increase in housing prices as in more frothy markets, with perhaps the exception of the Eastern Panhandle, so there’s less to correct [here] than in other states.”

Area home prices do remain far below the national average.
According to the National Association of Realtors, the median price in the Charleston metro area between April and June was $127,600, compared to $223,800 nationwide. And Charleston prices are rising, up 10.8 percent from the first three months of the year, while nationwide prices are falling, the Realtors research shows.

Sales are down here, but they’re down almost everywhere.
About 30,400 homes were sold in the state in the April-to-June period, down 13.6 percent from a year earlier, according to the Realtors. Nationwide, 10.7 percent fewer houses were sold, while in Florida the decrease was 41.3 percent and in California 19.8 percent.
“All these things happening in the market ... will have a direct and indirect effect on the West Virginia consumer because West Virginia is a part of the national market in financial terms,” Stark said. “There will be a definite ripple effect.”
For one thing, credit is a lot scarcer.

“There’s less money available to borrow, which will percolate down to the state,” Stark said. “Since there’s far less liquidity in the market to support the investment in mortgage loans, the ultimate outcome is simply that there will be fewer loans made, comparatively speaking.”
That’s already happening.
“The underwriting criteria is tightening across the board,” says Larry O’Dell, a broker with Mortgage Net, a Charleston mortgage brokerage. “They’re asking for more documentation, looking at debt ratings — it’s more difficult to get [loan requests] out of underwriting than it was two weeks ago.”

O’Dell said it’s especially hard to get approval for “subprime” borrowers, the weak-credit lending demographic responsible for many of the recent defaults.
“Very, very few subprime loans are being made now,” he said. “People in subprime are finding they can’t get the loan they would have gotten a month ago.”
Hurricane broker Lori Harless of Carteret Mortgage Corp. said her underwriter affiliates also are spending more time reviewing applications, but she sees the extra scrutiny as healthy.
“They’re taking a little closer look, they’re going to make smarter decisions,” she said. “This will be a great cleansing process we’re going through; you’re going to see more borrower education.”
The changes affecting the mortgage industry were unsettling at first, Harless said. “We [at Carteret] were getting e-mails every day from the home office about lenders closing their doors,” she said. “It was very scary.”
(Most of the lenders going bankrupt specialized in making subprime loans, and none were outlets that Harless worked with, she said.)
“In any industry you have bad eggs,” she said. “Ultimately, this could keep rates down, because you’ll have fewer foreclosures, fewer defaults, the lenders will be more profitable.”

That’s her long-term view, she
said. In the short term, she said, look for the government to keep rates down. On Friday, the Federal Reserve Bank did just that, approving a half-percentage point cut in its discount rate on loans to banks. The news buoyed stock markets in the United States and Europe.
As for the bad eggs, state regulators aren’t leaving it up to the market to clean things up.

Stark joined with dozens of other states’ regulators this week in adopting a series of recommendations for “nondepository” mortgage lenders and brokers, or those that aren’t housed in a traditional bank.

Such lenders now originate most of the loans made in West Virginia, whereas 30 years ago the field was dominated by banks and savings and loans. That has contributed to defaults because often nondepository originators will sell off, or “securitize,” the loans with little concern for whether or not the borrower can eventually pay off the debt. Traditional banks, conversely, have been more likely to function as originators as well as underwriters.
“Thirty years ago, when the vast majority of loans were being originated by the financial entity, that was also the same entity that held the loan, so clearly there was a strong financial incentive to make sure the underwriting was proper,” Stark said. “When you’re the underwriter, you had a direct stake to make sure these loans would be repaid.”
The new guidance is designed to get lenders to consider more than merely origination volume by taking extra steps to ensure that borrowers have the ability to repay and that they fully understand the risks they’re assuming. Lender and broker management, meanwhile, should put new policies in place to alert them to risks on the horizon, the guidance also says.
Though the guidelines aren’t enforceable as regulations, Stark said, they will carry considerable weight because so many regulators stand behind them.
“I’m confident that, collectively, with the other states, it [the guidance] becomes a standard and therefore inserts itself into new regulatory view of compliance by these players over a period of time,” he said.