The Truth About the Mortgage Market

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.

Lots of changes in mortgage approval process

Due to the upswing in delinquent mortgage payments in the subprime area and also, to some extent, in conventional loans, mortgage program offerings and underwriting standards are in a state of flux.

Many lenders have dropped out of the subprime market, and those that are left have tightened standards. They are dropping the two and three year ARMS which turned into nightmares for many unqualified borrowers. For the most part, only five year ARMs and 30 or 40 year fixed rate mortgages are available to subprime borrowers. Requirements for down payments are more stringent, as are rules for stated income loans. The least credit-worthy borrowers will have a tough time finding a lender, and they will not be able to find financing without a substantial down payment.

In the conventional market, there are still many loan programs available, but lenders are starting to qualify interest-only loans on the fully amortized payment amount, and are raising their standards for loans to borrowers with middling FICO scores. 100% financing is available, but at a higher price, and more lenders are requiring impound or escrow accounts (wherein borrowers pay their property tax and homeowners insurance along with the monthly mortgage payment). Many lenders are showing their preference for fully documented income and asset information by no longer allowing W-2 wage earners to be approved for stated income loans.

New underwriting rules are being announced almost daily from one lender or another, so if much time elapses between prequalification and actually submitting a loan package to a lender, the terms or pricing may change.

SILICON VALLEY COMMERCIAL REAL ESTATE MORTGAGES

Commercial property in Silicon Valley has rebounded after a prolonged downturn which began in 2001. Vacancies in all classes of commercial real estate are down sharply, and rents are up. Business owners and investors can look at a vastly improved (and more realistic) economy in Santa Clara County, California, and see strong indications for purchasing.

There are now many lenders interested in making small ($100,000 - 2,000,000) commercial loans. More lenders means more competition for borrowers, so it really makes sense to have someone shop for you. Loan programs are available for fully documented borrowers, stated income and even "no docs". Many lenders have relaxed the traditionally higher down payment requirement for commercial property, and are willing to loan with borrowers only putting down 10% or even as low as 3%.

Commercial loans are underwritten differently than residential mortgages, and interest rates depend on a lot of variables. To obtain the lowest rate and most appropriate financing, it's best to have a licensed mortgage professional research the gamut of lenders for you and help you through the process.