|by Chris Beagle|
|The Credit Crunch: Is the Worst Over?
With the second largest bank failure in U.S. history occurring in July, IndyMac Bancorp became the biggest casualty thus far of the subprime mortgage crisis. These lower-grade, higher risk-type mortgages have now been credited for bankrupting well over 100 lenders and seriously damaging operations at many major mortgage firms. They've reportedly wiped out multiple hedge funds, tens of thousands of jobs, and have led to millions of foreclosures with many more on the way.
This means that anyone who may be looking to buy, sell, or refinance a home is being confronted with a very different market from the one that existed just six to twelve months ago.
How did this happen?
The real estate boom that began just after 2000 was fueled by a period of record home appreciation and historically low interest rates. Banks, in order to compete, began offering more funding to more borrowers through 'riskier' mortgages. This occurred, in large part, due to a federal banking system which allowed such practices to exist.
These 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-evaluation of mortgage bonds and other financial instruments created the credit-liquidity domino effect we're now experiencing.
Unfortunately, it's very likely to get worse before it gets better. According to the latest estimates, over two million subprime and Alt-A adjustable rate mortgage (ARM) holders will face payment increases ranging from 30% to even 100%, when their loans reset in the next 2 to 18 months. These loans make up nearly 40% of the total mortgage market today, and are directly related to the increased foreclosure activity which has had a ripple effect throughout the industry and around the globe.
What's 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. Tightened credit guidelines and diminishing mortgage products could knock out as many as 15% to 30% of potential qualified buyers.
If your home is already on the market, now is not the time to sit and wait for the best possible price. You should have a serious talk with your real estate agent, who can help price, and re-price, your home accordingly. Discuss pricing strategies for two, four and six months from the time you first list your home. That way you will be better prepared for what you can actually buy.
A loan officer will help you determine what that figure actually is. Given current conditions, he/she should discuss various selling prices and interest rates with you. When you do sell, your proceeds may become something less than what you originally planned when you first put your home on the market.
Buyers: Other than identifying a qualified realtor, the next first step is to get pre-approved by your mortgage professional. While there are a lot of great deals out there, getting financing 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. Now more than ever, the strength of your credit can greatly influence your home financing opportunities.
ARM Borrowers: If you have an Adjustable Rate Mortgage (ARM) and it is scheduled to reset in the next 218 months, you should also schedule an appointment with a mortgage professional right away. Whether your ARM is subprime, Alt-A, or even if you have a prepayment penalty, don't let a default or foreclosure situation creep up on you. Your monthly payments can increase dramatically once your loan resets. At the very least, give yourself the peace of mind of knowing what your adjusted payment is going to be.
Borrowers with less-than-perfect credit: Each week it seems lenders are shredding 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.
Historically low interest rates remain: Sometimes it's hard to see through the forest in spite of the trees. While so much noise is being made about the negative credit crunch, historically speaking, mortgage interest rates (particularly loan amounts under $417,000) remain low. I'm sure many of you remember days when one could only dream of a rate at 6.50%. All is not lost.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. The correction we're experiencing now, while harsh and likely to get worse, is, in a sense, "natural" and will, eventually, correct itself. But hold on tight, it's likely to be a bumpy ride.
Chris is a Senior Loan Officer at GMAC Mortgage. E-mail firstname.lastname@example.org or call 302-226-2448.
LETTERS From CAMP Rehoboth, Vol. 18, No. 11 August 08, 2008