As a top ranked analyst, Ivy Zelman gets paid to monitor the home building industry for Wall Street investors. Turmoil in the mortgage industry has her attention these days. She says the problems started when housing markets were hot earlier this decade and mortgage companies offered borrowers - even those with weaker credit scores - loan products that required no money down or no proof of income.
Ivy Zelman: They kept developing easier programs to get more and more people into homes and part of the reason for doing it is that hey home prices are going up.
Mortgage loans become a popular and profitable Wall Street investment. Here's how it works: Mortgage brokers sell their loans to investors or firms who bundle them into bonds that are bought and sold by pension funds or mutual funds. But a cooling housing market and a rise in the numbers of foreclosures and late mortgage payments has pushed some lenders into big financial trouble.
Ivy Zelman: Even though we all knew that it was crazy that you had subprime borrowers putting no money down with no document loans but everybody kept saying but their fico scores are ok or home prices are going up. It just looked like a house of cards that at some point would collapse and unfortunately we're now experiencing the payback.
Since the end of 2006, over two dozen subprime lenders have closed their doors. Bankers are demanding that some lenders buy back bad loans, exerting huge financial strains and slashing stock prices at companies like the country's second largest subprime lender, New Century Financial. Lenders are tightening their credit or getting stricter about who they'll lend to. Zelman says that will have an impact on the number of homes that will be sold.
Ivy Zelman: Lets face it, If your worst credit buyer is no longer able to purchase the entry level house, then the people hoping to buy their next house cant sell their house and that's where you get the domino effect.
Zelman also points to government regulation on the lending industry. Ohio's high foreclosure rates pushed lawmakers to pass Senate Bill 185 which went into effect January of this year. Zelman says its having significant impact.
Ivy Zelman: It limits the kind of loans that unregulated brokers can make: no more no interest loans or no document loans, loans without proof of income. Its a whole new game.
Because of 185, Wells Fargo recently announced it would no longer offer certain types of loans to Ohioans including no documentation loans. But even as the industry starts to police itself, Zelman says in Ohio, the number of bad loans out there means there are more foreclosures on the horizon.
Ivy Zelman: If you have the right location and the right credit its probably going to be an area unaffected, but in some markets its such a fragile situation, especially in areas where manufacturing jobs have been loss, its just such a big risk for this state.
I'm Mhari Saito, 90.3.