September 15, 2007
By Robert English, Mortgage Broker
Texas Mortgage Connection
AUSTIN, TX – Subprime
mortgages have now been credited for bankrupting
well over 110 lenders and seriously damaging
operations at many major mortgage firms. They've
reportedly wiped out 5 hedge funds, tens of
thousands of jobs, and have led to millions of
foreclosures with millions more on the way. And,
as if that weren't enough, subprime mortgages
are also blamed for massive volatility in the
stock, bond, credit, futures, and real estate
markets here in the US and around the globe.
Some say losses in the mortgage securities
market alone could reach hundreds of billions of
dollars this year.
This means that, for any Americans looking to
buy, sell, or refinance a home, they are
confronting a very different market from the one
that existed just 6-12 months ago.
How did this happen?
The recent real estate boom was fueled by a
period of record home appreciation and
historically low interest rates. Banks, in order
to compete, loosened guidelines and began
offering more funding to more borrowers through
riskier, non-conforming or "exotic" mortgages.
These ideal lending conditions persisted for
several years, supported by high demand,
historical real estate data, home prices, and
massive trading volume/profits on
mortgage-backed securities and other financial
instruments on Wall Street.
Then, in 2006, a slowdown in real estate led to
a deterioration of home values, an increase in
inventories, and ultimately to today's
tightening of credit guidelines, leaving many
investors unable to sell or refinance out of
their existing positions. Many Americans who had
tapped into their equity were suddenly
tapped-out and overextended as home values fell.
Foreclosures followed in record numbers and a
re-valuation of mortgage bonds and other
financial instruments created the
credit/liquidity domino effect we're now
experiencing.
Unfortunately, it's going to get a lot worse
before it gets better. According to the latest
estimates, over 2 million subprime and Alt-A
adjustable rate mortgage (ARM) holders will face
payment increases of up to 30%-100% when their
loans reset in the next 2 to 18 months. These
loans make up less than 40% of the total
mortgage market, but the negative effects, as we
have seen, of increased foreclosure activity can
have a ripple effect throughout the industry and
around the globe.
What does this mean to you and your mortgage?
Sellers: If you're planning on selling your
home, be prepared for an even smaller pool of
qualified buyers. While some experts predict a
settling of this credit crisis over the coming
year, tightened credit guidelines and
diminishing mortgage products could knock out as
many as 15%-30% of potential qualified buyers.
Now is not the time to sit and wait for the best
possible price. Have a serious talk with your
real estate agent. Having experienced
buying/selling transactions in your area, he or
she can help you price your home accordingly. He
or she can also help ensure that your buyers are
pre-approved and stay pre-approved throughout
the entire transaction.
Buyers: Get pre-approved by your mortgage
professional. While there are a lot of great
deals out there, getting credit is becoming
tougher and tougher, and it's taking longer and
longer to complete a transaction. Remember, what
you qualify for today could change tomorrow in a
volatile market. For those looking to refinance,
keep this in mind. There is no time to delay!
Communicate with your lender. Don't do anything
that could negatively affect your credit, and
make sure you get all your documentation in on
time.
ARMs Borrowers: If your ARM is scheduled to
reset in the next 2-18 months, you need to
schedule an appointment with a mortgage
professional right away. Whether your ARM is
subprime, Alt-A, or even if you have a
pre-payment penalty, don't let a default or
foreclosure situation sneak up on you. Did you
know that your monthly payments can increase
anywhere from 30% to 100% once your loan resets?
At the very least, give yourself the peace of
mind of knowing what your adjusted payment will
be.
Borrowers with less-than-perfect credit: Each
week it seems lenders are shedding more and more
mortgage products. Many lenders have stopped
offering No-Doc loans and are reducing all forms
of Stated-Income loans. While it might be
challenging, borrowers with credit issues need
to see a loan expert. Often they have credit
repair resources and other strategies to help
you reach your financial goals.
Finally, there's an important concept to
embrace: all markets, while cyclical in nature,
are self-correcting, be it credit, real estate,
stocks, or bonds. For the last 6 or 7 years,
real estate was booming and riding high. The
correction we're experiencing now – while it
seems harsh and could get much worse – is, in a
sense, "natural" and directly related to the
extremely loose guidelines and perhaps
overzealous lending and leveraging during the
boom cycle.