Mortgage Market Meltdown 2007

Current State of Mortgage Financing...What's Going On?
Anyone watching or reading the financial news over the last few weeks has seen a lot of angst and consternation over the state of the mortgage industry. In fact, one of the larger lenders in the US, American Home Mortgage, was forced to shut down operations recently. But why? What the heck is happening? What does all this mean to you? and most importantly...what should you do right now to make sure you are protected?
Here's the Scoop
Over the past several years, many loans were made to homeowners with somewhat non-traditional or "non-conforming" situations, be it poor credit history, inability to document income, or any number of factors tht do not fit within the traditional "box" for home loans. These loans are ofter called "Sub-Prime" or "Alt-A", meaning that they were somewhat riskier in nature than "A" credit, prime or traditional loans. Another type of "non-conforming" home loan is one where the credit and income might be perfectly fine, but the loan amount is higher than $417K, which is the current maximum loan that can be done using pools of money from mortgage giants Fannie Mae (FNMA) and Freddie Mac (FHLMC). If the loan amount is higher, it can certainly be done - it's called a "jumbo loan" - but the end money comes form private institutions, not from the large government sponsored entities of Fannie and Freddie.
Most Non-Conforming Loan Product Rates Popped Significantly Higher Recently. Here's What Happened...
The end investor for Subprime or Alt-A loans will charge a premium for taking on a pool of these loans, because they know that traditionally, they might have a higher rate of defaulth and delinquent payments within that risky pool. But lately, default and foreclosure has been on the rise - partly due to the fact that with credit tightening and a soft real estate market, many troubled homeowners are unable to refinance or sell in order to get our of trouble. So now, these end institutions are demanding a much higher "risk premium" for taking on these pools of loans, as they see the rates of default are climbing higher.
But since these institutions are purchasing these pools of loans sometimes months after the borrower has actually closed at a given rate, this increase to the risk premium means that instead of paying $101K for a $100K loan that will bear interest, they may only be willing to pay $95K for that $100K mortgage to account for the risk. Multiply that time thousand upn thousand of loans...and you have millions upon millions of dollars in loss for the company trying to sell the pool at a much lower price than they were expecting. This is called a "liquidity crisis" , and is exaclty what happened to American Home Mortgage - there was no mismanagement, but they simply got caught holding too many "hot potato" loans, and forced to sell them at massive losses...and eventually they had to make the decision to close the doors and stop the bleeding.
What happens next? The major damage is probably already done, and the present situation will likely settle out over the coming year. Lenders will stop pulling products of the shelf, and the rates on products that have moved so significantly higher now should trend lover down the road as delinquency rates stabilize.
What You Should Know...
Potential borrowers cannont wait any longer. For those who are considering bying a home, be aware that the volatile credit market can change overnight, leaving fewer options available to borrowers attempting to qualify for a mortgage. This is even more true for those looking to refinance. With decreases in home values and fewer available mortgage instruments, any delay could get significantly more expensive.
Sellers can no longer be reluctant to accept offers to reduce prices. Tightening credit and diminishing mortgage products will continue to reduce the pool of qualified buyers. This, along with the increase in national housing inventories, means now is no the time to hold out for the "best" price possible.
Borrowers with applications in process must not delay. Applicants should work with their mortgage professional to complete all paperwork quickly, especially on non-conforming, stated income, and stated assest loans. Even minor delays can result in funds being yanked at the closing table!
Subprime and Alt-A refi candidates, especially those with ARMs scheduled to reset over the next 12 months, need to act now - even those with a pre-payment penalty. ARM borrowers stuggling with monthly payments now might be shocked to know that monthly payments can double in some cases once an ARM resets.
Buyers with credit issues or who have difficulty providing required documentation can no longer sit on the fence. If market conditions change, buyers who qualify for a loan today may not qualify a few wees from now for the same exact loan. Just this week, many lenders have stopped offering No-Doc loans, and some lenders have pulled back on all forms of stated loans. As market conditions continue to change, a buyer's pre-approval status can disappear even more quickly delaying or spoiling the deal.
But Here Are A Few Important Things YOU Should do Right Now:
ONE: Even if you are not presently in the market ffor a home loan of any type, make sure that your credit standingis as solid as possilbe. Many people in the market for a home loan didn't expet they would have a need, and didn't planin advance to ensure their credit would qualify them for the best possible financing. With no immediate need for a home loan, time is on your side...why don't we take a few minutes toether and just make sure you are prepared, should a need arise down the road? Call or email me Nancy Harris, right away. (213) 389-7888 nancy@harnanloans.com
TWO: If you are in the market for a home loan, or know someone who is - understand that now is the time to be working with a real qualified professional who can keep you informed of changes in the market and get your loan funded quickly. Now is NOT the time to be playing the riskly game of trying to scour the entire nation to find someone who promises to save you a paltry amount on costs, or deliver a rate that seems too good to be true.
Your home and you financing are just too important, and times have changed As an educated mortgage professional, I will utilize my experience and resources to help you and your loved ones to navigage through these turbulant times. Don't leave your future in the hands of some random mortgage provider. I'm local, accountable, and you can trust that I'll do everything in my power to help you succeed!!
Nancy Harris