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HATTERAS ISLAND REAL ESTATE
Hatteras is largely unaffected by mortgage market turmoil By TOM HRANICKA
The mortgage market for Hatteras Island properties is alive and well! With all of the recent news reports about problems in the mortgage market and wild swings in the stock market, it is easy to fall into the trap of believing that “the sky is falling” everywhere. In reality, the local mortgage market is feeling some fallout from the national and global dislocations, but the bottom line is that money is available for qualified buyers, and loans are being made largely without any significant interruption. The mortgage market has changed. It has not shut down, and the changes that are occurring are generally positive in nature. Let’s take a look at our mortgage market in more detail. I will warn you in advance that this discussion requires the use of some terms that are not part of our day-to-day language. Usually, the conclusion comes at the end of an article. In this case, I would like to summarize the issues up front and work backwards. After talking with several experienced lenders, this is my understanding of the local impact of the “mortgage meltdown”: • Conventional loans to qualified buyers are essentially unaffected by problems elsewhere in the mortgage market. Conventional loans are those with mortgage amounts up to $417,000. A qualified buyer is someone who can demonstrate his or her ability to repay the requested loan through a combination of their credit score, income, and assets. Interest rates on conventional loans are currently about 6.25 to 6.5 percent. • The mortgage crisis that we hear about on television is primarily associated with the riskiest loans. Examples of high risk loans include “no doc” loans and “exotic” loans. No documentation loans are mortgages that are offered without the borrower having to verify such important qualifications such as income, assets, and debt to income ratios. Exotic loans might include 1-year interest only adjustable rate mortgages (ARMs) and option payment adjustable rate mortgages. Under a 1-year interest only ARM, the borrower makes payments only equal to the interest on the mortgage for a period of one year. Then, the interest rate adjusts according to some pre-determined financial index. With an option payment ARM, borrowers make their own decisions each month about how much they will pay towards their mortgages. In combination with declining real estate values, option payment ARMs have the potential to create a situation in which the borrower owes more than the property is worth. • The “sub-prime market” that is capturing national attention is really an umbrella term that encompasses a number of types of loans, including those made to borrowers with bad credit, no documentation loans, no ratio loans, and any other exotic loans that were being offered before the mortgage crunch began. Sub-prime also includes borrowers who chose, for whatever reason, not to apply for full documentation loans. • We are also seeing some limited impact on “jumbo” loans – those with mortgage amounts in excess of $417,000. The primary change in this segment of the market is the emergence of higher interest rates. Normally, the interest rate on a jumbo loan is about one-half percent higher than the rate on a conventional loan. Today, jumbo loans are closer to three-quarters of a percent higher. Jumbo rates are presently in the 7.0 to 7.25 percent range. An important point to note is that, when used responsibly, mortgage options like no documentation loans and adjustable rate mortgages do not carry much more risk than other types of loans. For example, in the Hatteras Island market, any number of very well qualified buyers chose to finance their purchases with no doc loans because they didn’t want to go to the time and effort associated with traditional underwriting. Likewise, if a buyer intends to keep a property for only five to seven years, an adjustable rate mortgage may make a lot of sense. These are some of the changes in the mortgage market that we are seeing in response to the growing number of problem loans: • Some lenders are no longer offering no-documentation loans and closely related stated-income loans, or they are only offering these loans with higher down payments. • Borrowers who have limited or no equity in their properties and who are attempting to refinance adjustable rate mortgages are having difficulty finding alternative financing. • Acceptable credit scores have increased across the spectrum of loans, but not to the point that the new requirements are negatively affecting the ability of qualified buyers to obtain loans. • As noted, interest rates on jumbo loans have risen, but not to a level that they are pricing buyers out of the market. • While loans with as little as a 5 percent downpayment are still common, there is some movement toward higher downpayments, depending on the lending source. • Largely, as a function of rising interest rates on adjustable rate mortgages, more buyers are choosing traditional 30-year fixed interest rate mortgages. This may also reflect a fear factor on the part of some borrowers in response to the massive news coverage of problems in the mortgage market. One final observation is that as financial markets have become more global, mortgage market unrest has become international in scope rather than being confined within the borders of the United States. Consider this possible scenario. A foreign investor who wants what is perceived to be a low risk investment buys a pool of United States mortgages in which the down payment was at least 30 percent. Over time, the real estate market in the United States weakens, accompanied by lower prices and subsequently, lower appraisals. The decline in real estate values causes the underlying value of the mortgage portfolio to decrease so that the original 30 percent equity criteria established by the borrower is no longer being met. The portfolio has now gone from a low risk investment to a level of risk higher than the investor’s comfort level. The investor wants to sell the portfolio, but no one is quite sure how to value the underlying mortgages short of getting a current appraisal on each property in the package. The end result is a liquidity crunch. No one is willing to buy the investor’s portfolio without knowing its current level of risk. It’s not a simple problem is it? I think we can be confident that the problems that we are seeing in the mortgage market will work themselves out over time as has been the case in the past. Lenders who did not use good judgment are going out of business and federal regulators are making it more difficult for lenders to offer high risk loans as they have done during the past few years. As one lender put it, there is “a plea for quality.” David Bartels, a mortgage market seminar speaker, recently summarized current circumstances by commenting, “The old way of doing loans is the new way again.” As you watch television and read the newspaper, keep in mind that you are hearing the sensational news that generally applies to the national real estate and mortgage markets. Here on the Outer Banks, we are certainly influenced by outside events, but the reality of our markets and the financing of properties usually will have some unique local twists. It always pays to check the facts before forming a conclusion about how national events are playing out in our local market. Bringing our discussion full circle back to Hatteras Island, I think an indication of the quality of past lending decisions can be seen in the foreclosure statistics. At the present time there are only 29 properties in foreclosure on the island out of a total of about 8,600 privately owned real estate parcels – about 3/10 of one percent. By comparison, Realty Trac®, a national foreclosure tracking service, estimated that there was about one foreclosure filing for every 134 households in the United States during the first half of the year – about 8/10 of one percent, more than double the level on Hatteras Island. Don’t let discouraging news reports keep you from realizing your dream of owning an island home or lot. There is a large selection of very attractive properties from which to choose. Residential selling prices are about 35 percent below their level two years ago, and interest rates are still very affordable. It’s a great time to be a buyer on Hatteras Island! (Tom Hranicka is an associate broker with Outer Beaches Realty. Questions, comments, or suggestions for future articles may be sent to Tom Hranicka at P.O. Box 237, Avon, NC 27915, or e-mail to hranicka@hatterasisland.com ) Copyright©2007 Tom & Louise Hranicka. All rights reserved. 
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