It’s difficult to believe, but it has now been five years since Lehman Bros. — once the fourth-largest investment bank in the U.S. — filed for Chapter 11 bankruptcy protection after the loss of most of its clients, a collapse of its stock, and a devaluation of its assets by credit rating agencies.
Lehman had been holding on to large positions in subprime mortgage securitizations, and became the last guy left holding the bag when that market collapsed. The shock waves of this collapse were felt for several years throughout Wall Street.
And since then, the real estate market has gone through numerous and profound changes.
A New World for Mortgages
For three years after Lehman Brothers collapsed, the mortgage market tightened up and made borrowing more difficult. For instance …
- Conventional 30-year mortgages, which had formerly required no down payment, were suddenly requiring as much as 10% down — even 20% down on properties in declining markets.
- Credit score requirements ballooned from 560 to 640, and have only recently pulled back to 620 on owner-occupied property.
- FHA increased its MIP fees and made PMI (which once could be eliminated once a borrower paid off 80% of their loan) a permanent entity for the life of the loan.
Also, new regulations in the mortgage industry have totally changed what lenders can offer their clients, as well as the borrower’s ability to qualify for a loan.
The Dodd-Frank bill created the Consumer Finance Protection Bureau, which has formulated new rules and regulations that will go in effect January 2014. Some of these rules restrict the amount of money that loan officers can make, and severely regulate the ability of home builders and real estate brokerages to form affiliations with title companies and lenders.
Lenders now must follow specific guidelines to produce “qualified mortgages.” Former loan products — such as interest-only, 40-year terms, negative amortization, and no documentation (“no doc”) — are gone. Changes in good faith estimates and other loan documents have been made, too.
As you can see in the accompanying chart, home values swooned from 2008 to 2011.
Some states, such as California, Nevada, Arizona and Florida, which had the highest number of subprime loans and subsequent foreclosures, saw home values drop as much as 40%. Foreclosures were selling for 25% to 30% of their 2006 values, and the sales of these properties were negatively affecting the values of non-foreclosures as well.
But other areas of the country — such as the Midwest and Northern Plains, which did not have price bubbles from 2000-07 — reported only modest price declines. States that have had the lowest unemployment, such as Texas and North Dakota, have continued to see steady sales numbers and stable prices.