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Navigating the credit crunch: Will subprime woes leave you dry? Here's what to look for.

September 24, 2007

For months, we've been reading and hearing news about the so-called subprime mortgage crisis and the resulting "credit crunch."

For thousands of families who have lost their homes to foreclosure, the crisis is clear. For most people, however, the impact isn't so obvious.

Beyond those directly affected by mortgage defaults, who else should be concerned about the aftershocks?

Some economic forecasters are warning that the subprime mortgage situation and the ongoing weakness in the housing market could linger long enough to push the economy to the brink of recession.

Fanning the flames is a report from the National Association of Realtors that reduces its home sales forecast for the ninth time this year and says the housing slump will extend into 2008.

Locally, Roger Youngs, president and CEO of Indianapolis-based credit union Finance Center FCU, shared an ominous sentiment.

"We haven't seen everything yet; it's just the tip of it," he said. "The next several months will begin to tell the story for us."

So, what does this credit crunch mean to you? IBJ asked several experts in the real estate and lending industries to weigh in on the most vexing issues.

IS IT A BAD TIME TO SELL A HOUSE?

Not really, according to James Litten, president of Tucker Residential Real Estate Services division. But it's a better time to buy one.

In 2005, Tucker's peak year, the firm sold 36,000 homes. This year, Litten expects the amount to be closer to 31,000, which was about average before the real estate market skyrocketed a few years ago.

"There are a lot of homes that are priced very competitively," he said. "Granted, we'd like it to be like it was in 2005, but every business has its cycles."

Well-priced homes in desirable neighborhoods still sell fairly easily, according to real estate experts. Most homes, however, are staying on the market longer than usual and selling at a discount.

According to the latest statistics from the Metropolitan Indianapolis Board of Realtors, pending home sales fell 14.2 percent in August compared with a year earlier. For the year through August, the region is down 6.1 percent in pending sales from the same period in 2006.

The average sale price of area homes in July-$163,612-was 3 percent lower than it was the same time last year.

The current inventory of homes is 8.7 months, compared with seven months last year, Litten said. An inventory extending more than four months is considered a buyer's market. And that's good news for those who plan to buy another home to replace the one they're selling. Nowhere is that more true than in the high-end market, where existing homes

priced between $500,000 and $1.2 million have been moving slowly.

Larry Rasmussen, broker/owner of Century 21 Rasmussen Co. Inc. in Carmel, said he's sold two homes this year priced at more than $1 million; he sold six in that range in 2006. Part of the problem, he said, is that customhome builders are lowering their prices and putting more pressure on existing home sales.

There are 638 homes in Hamilton County listed for at least $500,000, the most of any metropolitan-area county, according to the Multiple Listing Service. So far this year, 313 homes in that price range have sold in the county, compared with 378 during the same time last year.

"The listing inventory we have is mounting up," Rasmussen said, "and it makes it so that the edges need to be sharpened on the houses that are outdated to compete against new construction."

IS IT HARDER TO GET A MORTGAGE?

It's not difficult for most people if they have stable credit, insisted Derek Danks, president of locally based Sun Mortgage LLC, which closed on $101.5 million worth of loans last year. He expects business to be the same this year.

"For the normal person who says, 'I want to buy a home,' that's not going to be " he said "

talks about the products and programs that went away, but most of those were exotic-type loans."

To be sure, a potential home buyer in the current market would be hard-pressed to finance 100 percent of a home's value with no down payment, or receive an adjustable-rate mortgage with an interest-only attachment. More than

90 mortgage compa nies-many that specialized in such high-risk loans-have collapsed as a result of defaults by homeowners.

For most home buyers, though, an average 6.3-percent interest rate for a conventional 30-year fixed mortgage, compared with 7.6 percent 10 years ago, is still reasonable, Danks said. And firsttime home buyers can seek loans from the Federal Housing Administration, which has one of the best programs for new owners, he said.

But some borrowers are finding it harder to get a mortgage. About 14 percent of domestic banks have raised standards for mortgages, even for their bestrated customers, and 56 percent have made it more difficult for people with limited or poor credit to get loans, according to a Federal Reserve survey of senior loan officers.

Upper-end buyers might also have some difficulty financing a home. Some lenders are jacking up rates on jumbo mortgages for prime borrowers. These mortgages exceed the $417,000 limit for loans eligible for purchase and guarantee by Fannie Mae and Freddie Mac. They account for about 16 percent of the total mortgage market, according to trade publication Inside Mortgage Finance.

Lenders are charging an average 7.34 percent for prime 30-year fixed-rate jumbo loans, up from 6.5 percent in mid-May. The loans are still fairly easy

to get; they're just more expensive. Jumbo shoppers who can put off their purchase might be better off waiting a month or two to see if big corporate investors regain confidence in the mortgage market. Those who can't wait might want to consider increasing their down payment to bring the loan into conventional status or taking out two separate loans.

Overall, Danks said, the local mortgage business is weathering the storm.

"A lot of things you're reading right now are negative. People read those things here and think, 'Wow, they're talking about our market,' but they're not," he said. From a housing and mortgage standpoint, I don't know how people can't be positive about what's going on here " HOME EQUITY ANYONE?

Interest rates for home-equity loans and lines of credit are up a smidge-between 7 percent and 8 percent, but not enough to disrupt demand, said Mason Coleman, senior vice president and retail executive at the local office of Cincinnati-based Fifth Third Bank.

He noted that declining home prices should prompt consumers considering a home-equity loan to get their property appraised, because the loan-to-home value rate has an impact on pricing.

According to some experts, slumping home prices in many areas are reducing the equity homeowners can borrow against.

Some lenders have stopped offering home-equity loans altogether. Others have tightened lending standards so that those with less-than-stellar credit scores can't always qualify.

Delinquent home-equity lines of credit-those late by 90 days or more-jumped 16.6 percent in the second quarter, according to the Federal Deposit Insurance Corp.

Coleman declined to comment on Fifth Third's performance in the homeequity market, but said the stability of banks allows the institutions to weather the storms.

"We're used to working through these cycles, and banks are typically pretty steady throughout," he said. "We don't anticipate a lot of movement one way or the other."

ARE CREDIT CARDS AFFECTED?

Yes, although issuers are making it difficult to determine to what extent. New York-based JPMorgan Chase & Co., which purchased Chicago-based Bank One Corp. in 2004, is declining to conduct interviews on the subject, a spokeswoman said.

The company instead issued this statement: "Like other financial services companies, Chase is watching the turbulence in the market very closely. We see no material change since our second-quarter earnings announcement."

JPMorgan Chase, however, is

among card issuers who indeed are raising interest rates, while others are cutting back offers to less creditworthy customers or lowering credit limits.

The Associated Press cited Jamie Dimon, the president and CEO of JPMorgan Chase, as telling analysts in a recent conference call that his bank, one of the largest card issuers, was cutting back on teaser rates and balance transfers. It instead is looking to profit from greater growth in existing accounts.

For competitive reasons, companies are reluctant to reveal the changes they're making. When contacted by AP, Bank of America Corp. in Charlotte, N.C., said it "maintained consistent underwriting standards" and evaluated each credit application on the individual's merits. USAA in San Antonio said it was monitoring the market "and will make changes if

necessary."

But the changes in consumer credit products are nowhere near as extreme as those involving mortgages. The dollar amounts involved are much smaller and defaults haven't been as worrisome. That's because credit companies can raise the rate with little notice or shut off the line of credit at any time.

WHAT IS THE EFFECT ON OTHER LOANS?

The demand for auto loans has been on a wild ride of late. Consumers took out fewer of the loans in July than a month earlier as auto sales tumbled to a two-year

low. But sales rebounded in August, increasing 2.8 percent over July, the biggest monthly increase in two years.

GMAC LLC, the lender that reported more than $1 billion of mortgage losses after General Motors Corp. sold a controlling stake last year, is getting as much as $21.4 billion in additional credit from Citigroup Inc. for auto and home loans.

At Forum CU in Fishers, auto loans had been down due simply to a decline in car sales, said Andy Mattingly, the credit union's senior vice president of strategy and marketing. But getting one isn't a big problem. "If you talk to any of the auto lenders, it's the same way," he said. "We don't see it being an issue right now." Meanwhile, access to student aid may get easier. Congress passed a bill earlier this month that will boost college financial aid to $20 billion by taking money from governm e n t - s u b s i d i z e d lenders to in-crease federal Pell grants and decrease fixed-interest rates for student loans.

The maximum grant would rise from $4,310 to

$5,400 in the next five years. The act also would cut interest rates on government loans for undergraduate students from 6.8 percent to 3.4 percent by 2011, and cap loan payments so students won't have to pay more than 15 percent of their monthly income.
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