3-31-07

   In 2007 we are looking for a shake out year. New builders are lowering their inventory; resells are still working through unrealistic prices, now the sub-prime issue is coming in to play. All the while, the Fed stands pat, hoping things will go as planned from their perspective.

   The press has made headlines with the sub prime market, spilling into the prime market; this has not happened, nor will it. Sub prime has typically been 10% to 15% of the total mortgage market. Last year it was 20%, which is good for the fact that a larger amount of people are buying homes, the first step in creating wealth and stability for families. The bad part is that this sub prime borrower took out an ARM loan 40% of the time. With rates going up, they have seen their payments head skyward.

   There have been many sub prime lenders go out of business across the country, and Phoenix metro area has seen its share. The reason is simple; these sub prime lenders are originators of the loans. Once they make the loan, they resell them. I'm sure you have seen this yourself on your own mortgage. The problem has been that when they resell these loans, the buyer has a right to sell them back to the originator if the default rate exceeds a predetermined level. Because of the ARM's primarily, this has started to happen. The sub prime lenders are not heavily capitalized to buy these loans back, so they just go out of business. Usually the principles are re-capitalized and start under a new name rather quickly.

   The way this can affect our business is that a buyer might be approved for a loan, and then in the last minute find out his lender is out of business. Thankfully, with the capitalistic market we live in, the demand will be filled by someone else.

   Prices have not collapsed as so many had predicted. They have come down, but not dramatically nor continually. The average price for a home in Phoenix, is up about $10k from this quarter last year, although down from the peak. As a majority of the houses that I lend on is under $250,000, this price range and demand has been steady.

   On the supply side, I see some positives and negatives. On the positive side, the new builds have worked off a bit of their inventory, so the promotions with free pools and plasma TV's are no longer the norm, which means less competition for the resells. On the negative, we have seen the number of houses on the market rise to new highs in the last few weeks, mainly because of the spring buying season.

   There is one other wild card out there, the number of foreclosures in the pipeline. For the first time in five years it's starting to rise dramatically. This is a positive for many of my borrowers that have had a hard time finding good buys. However, the last thing we need is more inventories of houses on the market. Why I think it may play out a bit different is that the lenders are aware of this, so they are going to be much more willing to work out the loan. Many of the lenders that made loans at 90% + LTV will be seriously under water if they foreclose and try to sell the house. It's in their interest to keep some payments coming. They may have to drop their prepayment penalty and refi the homeowner.

   I'll leave this long discussion with a positive note. The net population gain in Maricopa County was 130,000 people last year. There were more then 30,000 people last month that changed to an Arizona driver's license! With continued population gain, that helps sustain a demand for housing and will soften the landing and hopefully the return of a stronger real estate market.

   I have added a net $400,000 of new investment money; we have $12.3 million in the portfolio. Despite all that is going on, the demand for loans is quite strong. As I'm typing this I have over 20 deals on my desk, waiting to see how much money I get back by week end.

   I have updated the pictures of the current properties on the website. Thanks for your trust, investment, and referrals.

   Denny J. Chittick