Did We Dodge the Bullet?

Written By Patricia Rouzer

Like a summer day chilled by a sudden storm, Carroll County’s once blistering-hot housing market has cooled precipitously in past months. But local real estate professionals, builders, bankers and mortgage brokers seem to agree that the storm has not yet fully passed.

Yet in many respects, Carroll has been lucky so far. People who know the county and its housing market say Carroll has not been nearly as hard hit as many other areas in the country and state. Yes, you can still sell your house. People continue to build here. But there is no doubt housing prices have declined. And selling or building a house generally isn’t as routine or as quick as it was only a few years ago.

That is because the economic rules underpinning the housing market have changed rapidly and radically. As the stock market roller coasters up and down and formerly fiscally fit financial giants like Bear Stearns see their balance sheets sicken from years of gorging on a steady diet of subprime mortgage-backed securities, the former flood of easy mortgage money has dried to a trickle. And the availability of that fiscal fuel has caused the market to slip into a growing torpor.

Citing mounting concerns over foreclosures and bankruptcies, banks that once all but threw money at borrowers, have drastically tightened their lending criteria. Now they carefully scrutinize the financial pedigrees of anxious borrowers. But despite the banks’ nervousness, countians paying on those easy-to-get loans of earlier days seem to be holding their own, at least for now.

Carroll’s current foreclosure picture, while not completely rosy, is clearly not one that raises undue alarms. As of late April, the website foreclosure.com listed 38 foreclosed properties for sale. An additional 25 properties were for sale as a result of bankruptcy filings in Carroll County.

Statewide statistics on the foreclosure website showed 2,267 foreclosures, with an additional 5,004 bankruptcy sales. The website also listed neighboring Baltimore County as having 148 foreclosures and 653 bankruptcies. Frederick county had 123 foreclosures and 45 bankruptcies; Howard county, 125 foreclosures and 24 bankruptcies; and Harford county, 67 foreclosures and 62 bankruptcies.

“Of course there are foreclosures.,” said Mark Rychwalski, manager of American Ideal Mortgage in Sykesville. “There were foreclosures here at the height of the real estate boom a couple of years ago. But I haven’t seen an astronomical surge and I don’t think there will be one.”

Rychwalski, who has worked in Carroll county for about nine years, added that foreclosures are more prevalent in urban areas such as Baltimore and Prince George’s County and often disproportionately involve investment properties

Despite the county real estate market’s relatively placid performance in the midst of national turmoil, Rychwalski’s business and that of other mortgage brokers has suffered greatly because of the credit tightening, he said. During the glory days of the boom, it was commonplace for people with no down payment and marginal credit ratings to get mortgages on pricey McMansions that sprang up around the county. Those days are gone.

“Today, if a borrower doesn’t have 15 or 20 percent to put down, a strong credit rating and real job stability, the banks don’t want to talk to them,” Rychwalski said. He feels strongly that mortgage brokers have been made the heavy in the gloomy loan default picture.

“The fact is,” he said, “we’re small business people. We don’t establish underwriting criteria, we don’t have money and we don’t make loans, but we’re the guys getting squeezed in the middle.”

Mortgage brokers are fiscal matchmakers, introducing potential borrowers to banks with money to lend. What, if anything, happens from there is strictly at the discretion of bank and borrower. Right now, said Rychwalski, not much is happening.

Tom Rasmussen, President and Chief Executive Officer of New Windsor State Bank, the county’s only independent, locally owned State-chartered bank, painted a fiscally conservative picture of his bank’s lending practices, but noted that with the current media groundswell of gloom over the housing market, new state and/or federal banking regulations seem inevitable.

“We haven’t changed our underwriting standards, we’re still making loans and we have no defaults on our books,” he said, adding that NWSB sells mortgages, but also keeps some in the bank’s portfolio. He notes that smaller banks, by their size and nature, are generally more conservative than money center banks, because the impact of every loan default is much greater than it is on the gargantuan national financial institutions.

“Every bank is different,” Rasmussen said, adding “Some banks are willing to take more risks. But we are a community bank and we won’t endanger ourselves by taking on too much risk. Many of these mortgage products that have caused so much trouble were created on Wall Street, and you know that when Wall Street creates something, someone is going to sell it.”

“You have to keep in mind, however, that regardless of what the product is, no one put a gun to any borrower’s head and made them take a loan. People have to take personal responsibility for their own decisions.”

Personal responsibility is a theme echoed by Rychwalski as well as James H. Billingslea, Jr., president-elect of the Carroll County Association of Realtors and head of the Billingslea Agency, a Westminster insurance and real estate brokerage.

“When I started in the family business in 1972 you couldn’t buy a home unless you had at least 20 to 40 percent to put down,” said Billingslea. “There is no doubt that with looser credit standards people bought homes that they shouldn’t have.”

And Rasmussen and Billingslea believe, as does Rychwalski, that things, at least in Carroll, are not as bad as the picture reflected in the national media. Things are slower than they were, but they certainly haven’t ground to a stop, said all three.

Carroll Countians can sell their homes here, often in as little as 30 to 60 days, if they face up squarely to today’s economic realities, said Billingslea. And qualified buyers who have money to put down and a solid credit score are in their glory.

“There’s no doubt that this is a buyer’s market,” said Billingslea. “This is a correction – a major one – and it was long overdue. But when a house is priced to accurately reflect its value in the current market, it moves.” Still, current market value can be a downer that some sellers are reluctant, if not downright resistant, to face.
When the market was white-hot, people saw the value of homes skyrocket.

“Say someone bought a house for $80,000 25 years ago and in 2005 he saw his neighbor’s house – very similar to his-sell for $350,000 in a matter of days,” said Billingslea. “Now, he wants to sell his house and he wants $375,000 for it and won’t take less. That house is going to sit there for very long time because more realistic sellers are listening to the market and they are pricing their homes accordingly.”

No one should really be shocked by what has happened to the market, said Billingslea, although the rapidity with which it happened may have taken many by surprise.

“Housing values were increasing by 20 to 25 percent a year over the last several years,” Billingslea said. “That isn’t sustainable and it isn’t realistic.”

Nor were the readily available loans packaged in a variety of “creative” debt instruments that enabled people who did not have appropriate financial resources to merit the loan they got.

“Faced with all these loan options, people abandoned the old-fashioned idea that you buy what you can afford; and if you aren’t sure you can afford it, you wait to buy it,” said Billingslea.

“For example, some people who didn’t have a down payment or had a very small down payment didn’t want to buy mortgage insurance.” Most banks require borrowers with less than 20 percent equity in their homes to carry the insurance.

“To get around that,” he said, “banks made these customers two loans: a first mortgage for 80 percent of the house’s price and a second mortgage for the remaining 20 percent.”

It is a pretty good bet that many banks are regretting applying that level of creativity in their lending practices. And, with loans heavily weighted toward paying off the interest in the early years and the values of homes declining, many a hapless borrower who has earned little equity in his home may still wind up owing the bank money after the new buyer has paid him.

“The people I feel sorry for,” said Billingslea, “are those who were transferred here two or three years ago and now have to move because they’ve been transferred again. They bought at the top of the market and they are now forced to sell in a declining market. They don’t have the option of staying in their homes until the market stabilizes.”

As for Carroll’s formerly frantic building boom, that too, has cooled. Statistics compiled by the U.S. Census Bureau show that in 2002 – the apparent height of the boom – the county issued 1,495 building permits for construction of single-family houses. The construction costs for those were estimated to be $187 million. In 2003 the number of building permits dropped to 1,046. At the end of 2007, the number of permits issued in Carroll had dwindled to a mere 319.

Recent statistics show that 38 county building permits for single family houses had been issued from January 1 to March 31 of this year. The number for the corresponding period in 2007 was 76: almost twice this year’s total. To put both of those numbers in perspective, the 2002 number for the same period was a whopping 338 permits-almost nine times this year’s total to date.

Still, Tony Letke, senior vice president and partner in Mueller Homes, Inc., a Sykesville-based custom builder, said business has not been bad as the popular perception would have it.

“Things are a little tough, but we’re doing okay,” said Letke. “We’re still building and we’re a little fed up with the media reports that make it seem that things have come to a halt.”

“Even though some of the costs of our materials have gone up with the cost of oil, such as pvc pipe and fiberglass, custom houses are still within the reach of many people,” he said, adding that people are still calling for designs and plans, although they are taking longer making decisions about what to include in their homes and when to build.

About a third of Letke’s customers already own a building lot when they contact Mueller for design and construction of a home; two thirds either buy a lot from Mueller, which maintains a small inventory of properties, or Mueller helps them locate a building lot.

Although tract housing offers economies because builders buy materials and labor in bulk, custom homes can be more economical in the long-run, Letke said.

“On the whole people are coming to us to build smaller homes than they did a couple of years ago; homes that are more energy efficient and more tailored to their lifestyle.

“Our customers are successful people who have money to put down, can get a loan, and have good, solid jobs,” he said. “They may not pick the most expensive options, but they know that by custom building they will have what they want at the price they can afford.”

Billingslea noted that “price they can afford” is the part that sometimes gets lost in many people’s quest to fulfill their dream of home ownership.

Before the boom “people lived within their means,” he said. “They knew what they could afford. They were conservative. They took into account the potential financial impact of losing a job, having a baby or dealing with a serious illness might have on their ability to pay their mortgage. That isn’t a bad way to think. And, in the current market, I hope people get back to thinking that way.”