Develop Your Strategy for a Mortgage Industry Shutdown | John Burns Real Estate Consulting

Develop Your Strategy for a Mortgage Industry Shutdown

There is a real threat that mortgage bankers will become far more conservative in the coming months. For planning purposes, we suggest that your business plan consider a scenario where you can only sell homes to very high-quality borrowers. For many of your communities, that might mean making the loan and holding it on your books or in a joint venture with another firm.

In the last 2 months, the CEOs of Citigroup and Merrill Lynch have lost their jobs, and the CEO of Wells Fargo said, “We have not seen a nationwide decline in housing like this since the Great Depression.” Both banks and the buyers of mortgage-backed securities believe there is a real chance that home prices can fall 20% or more over the next few years, which means that even an 80% loan to a quality borrower in many states has significant risk.

If you have information about your pricing, submarkets and buyer profiles that leads you to believe that there is very little chance that the homes you are selling will fall 20% in value, you might consider forming a venture to make piggyback loans or whole loans. While this is clearly not a preferred choice, it might be the only choice next year that allows you to continue selling homes at a reasonable sales pace.

If this idea seems absolutely absurd to you, ask some of the industry veterans how they survived the 1981-82 downturn. Most of them made the loans on the homes they sold. Today’s environment is much different and the loan would be much riskier, but the key to survival is selling homes and recovering as much of the cash you have already invested as you can.

If you have any questions, please contact us at (949) 870-1200 or fill out this form.