What’s the Mortgage Crisis All About?

That’s the question I’m being asked a lot these days. I’ll try to answer in layman’s terms.

First, most homeowners will not be directly affected by the current crisis in sub-prime mortgages. Homeowners with conventional, non-adjustable mortgages will continue making their mortgage payment and owning their home just as they always did.

Now a little history. The problems started a few years ago when lenders began making risky and expensive loans to buyers with less than desirable credit histories. Mortgages requiring no down payment or interest-only payments were given to almost anyone who asked. Some buyers were even permitted to borrow more than the current value of the home, justified by the idea that the value would surely increase.

Another practice by some predatory lenders is behind much of the current mortgage fiasco. These lenders offered extremely low “teaser” interest rates that would significantly increase at some point in the future.

The future is here! The interest rate on many of those mortgages has increased dramatically.

When a lender gives a mortgage, he in turn “bundles” that mortgage along with many others and resells them to investors. That’s common practice and it’s what’s causing jitters in the financial markets these days. Investors are nervous about recouping their costs on these risky mortgages – never mind making a profit.

The sub-prime mortgage has dried up and blown away. There are plenty of banks and mortgage companies still making fixed rate 15-30 year mortgages to credit worthy buyers. But unconventional mortgages being made to buyers with unsubstantiated income, poor work history, and poor credit are history.

Overall, this is a good thing. When things settle down, buyers will have safer, surer mortgages financing their homes.

As I said earlier, most homeowners will not be directly affected but everyone has been indirectly affected.

As buyers whose interest rates have jumped up cannot make the payments, a ripple effect sets in. That’s bad enough, but thousands more will face the same problem in the next couple of years as their interest rates reset.

When lenders foreclose and homes sit vacant, prices start to drift downward. That can affect all the houses in an area, particularly if that area had a large number of homes financed by sub-prime mortgages. When the inventory of homes for sale increases, prices dip even further.

Lenders have tightened credit standards. That translates into fewer eligible buyers, which can mean a greater supply of unsold inventory, both existing homes and new construction.

As the inventory of unsold homes increases, fewer new homes are built. Naturally, that means fewer paychecks going to construction workers and fewer purchases from wholesalers. Families have less disposable income and retail sales take a hit.

I’m sure you get the picture.

Here’s the good news. Activity in only seven states (Arizona, California, Florida, Indiana, Michigan, Nevada, and Ohio) accounts for the overall rise in delinquencies nationally.

The Federal Reserve Board recently lowered interest rates, thereby helping to stabilize financial markets.

Congress is considering revising rules that govern Fannie Mae and Freddie Mac, which buy nearly all prime mortgages under $417,000.

Treasury and HUD are looking to find ways to assist borrowers who are creditworthy, but who got caught in a pinch and are facing mortgage payments than they can no longer afford.

Best of all, do not be discouraged. There are plenty of banks and mortgage companies still making fixed rate 15-30 year mortgages to credit worthy buyers. Reputable, conservative lenders have money for mortgages to credit-worthy borrowers. Interest rates are favorable. There are lots of homes on the market; it’s a buyer’s market.

If I can help you buy a home, call me. It’s what I do full time. I would be happy to help you in these confusing times.

For more information:

http://useconomy.about.com/od/governmentagencies/p/FNMA.htm

http://useconomy.about.com/od/governmentagencies/p/FHLMC.htm

http://useconomy.about.com/od/economicindicators/tp/Subprime-Mortgage-Primer.htm

http://homefinance.nytimes.com/nyt/article/news/2007.08.21.bankrupt19/3/

http://nationalrealtynews.com/content/templates/standard.aspx?articleid=557