The January edition of Secondary Marketing Executive features an article on the state of origination and secondary marketing in the rural residential sector. If you haven't been following this sector of the industry, you may be surprised to learn that it is only now starting to see the first cracks that raced across most of the industry in 2008.
In many ways, the rural sector had a built-in immunity that protected it from the chaos inflicted upon the urban and suburban markets. For starters, its main lenders were the community bankers and Farm Credit System institutions that stuck with the traditional, conservative products and never indulged in the flashy subprime offerings. These institutions are among the ones that are still standing today without any significant problems to their bottom lines.
Second, the agricultural industry has not experienced the tumult that troubled other industries. The mass layoffs and crumbling corporations that pockmark the urban and suburban areas are nowhere to be found in rural America.
Furthermore, the U.S. Department of Agriculture's Rural Housing Service has already stepped up to the proverbial plate. In a speech at last October's Mortgage Bankers Association's annual convention, Russell Davis, the administrator for the program, noted that the program has only seen rising delinquency rates in five states, while originations have doubled in 2007 and 2008. This has been among the successful examples of the federal government making a positive impact on the housing market.
So far, so good. Alas, there are problems. Foreclosure rates, while relatively low compared to urban and suburban areas, are on the way up, while property values are on the way down. Unique to the rural sector are problems with appraisal standards in relation to the secondary market.
Greg Burger, president of MinnWest Bank in Luverne, Minn., explains that Fannie Mae and Freddie Mac ‘are now requiring comparable sales no more than six months old and within 25 miles of subject property. If you have a home out in the country and cannot find comparable sales to meet those qualifications, it will be difficult to get loans into the secondary market. We're sort of getting redlined.’
There is also the question of whether the agricultural industry will continue to be strong in 2009. This is beyond the control of mortgage bankers, of course, but nonetheless, there is cause for alarm. If agriculture remains sound, it will be a wild anomaly in view of what has happened to the rest of the economy. But if it sours, it will drag down this housing sector with great speed.
No one is predicting the swift decline and rapid fall of the rural sector, but we need to be cognizant that difficulties are starting to form here. The rural sector is the last major stronghold within the industry, and if it crumbles, then the situation will move from very bad to much, much worse.
– Phil Hall, editor, Secondary Marketing Executive.
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