The Subprime Meltdown: A Hot Summer Issue

The real estate market typically heats up during the summer months. This year, however, with the subprime correction in full swing, the National Association of REALTORS® is predicting a slight pullback in speculative buyers that could lead to a downshift in the entire real estate market. For a lot of homeowners, this just means home prices are normalizing after an amazing run up over the last few years. However, for many Adjustable Rate Mortgage (ARM) holders and borrowers with potential credit issues, this summer cool off could spell disaster.

It's all over the news: more than half of last year's top 25 mortgage companies have either reported serious losses, been sold off to other companies, or filed for bankruptcy! This has resulted in a tightening of lending standards and underwriting guidelines which has and will continue to impact the real estate market for some time. In fact, bond expert William H. Gross predicts that the fallout from the subprime collapse will likely affect the housing outlook for years to come. When asked how many borrowers would be impacted by changing guidelines and tightening credit standards, Bill Dallas, mortgage industry icon and former CEO of Ownit Mortgage Solutions, estimated "anywhere from 10% to 40%," adding, "the coming shift in available products will be huge." This could impact anyone seeking financing, not just throughout the summer season, but throughout the next 12 to 18 months as well. How has this happened? And how does this affect your mortgage?Over the last few years, credit standards were loosened considerably as home prices surged to record levels. This meant that many borrowers who normally would not have qualified to purchase or refinance their homes could suddenly and easily obtain greater financing than ever before. In addition, because home values appreciated so quickly throughout this time, even borrowers with serious credit deficiencies could obtain 100% financing without ever having to document their income. However, as the market changed, homes prices began to contract and interest rates began to rise. This resulted in more and more subprime loans falling into default, and a wave of foreclosures exposed subprime investors to serious risk. Suddenly, the Wall Street bankers who purchased the loans sent them back, and the subprime lenders paid the price. As a result, credit standards tightened, underwriting guidelines changed, and subprime mortgage products dwindled. Current or potential borrowers who qualify for a purchase or refinance product today may not even be able to do so in the future.

It's important to note that a certain reluctance to offer credit is a normal, and often predictable, response to changes in the real estate market. Like an economic pendulum, the availability of credit swings back and forth over time, as hot markets flame and cool markets wane. This back-and-forth "movement" is the most basic characteristic of the cyclical nature of any market. At the height of the recent real estate boom, this pendulum clearly favored consumers, offering more credit options than ever before, thanks to lax guidelines and an inordinate increase in the use of subprime products.

Today, as the market turns and the pendulum swings back to the more conservative side, it does so with a lot of force! What should you do now?If you or someone you know has a subprime loan, especially an ARM or a hybrid ARM about to reset to a higher rate, you need to speak with a mortgage professional right away. With loan guidelines and credit requirements tightening so heavily, and property values still declining in many neighborhoods, you may not even qualify for a refinance if you wait too long and the pendulum passes you by. Even if your mortgage has a pre-payment penalty, it may be less expensive to absorb the penalty now and refinance into a more affordable or stable mortgage.

Fixed rate programs are approaching eighteen-month lows. Remember, if you have an ARM, your loan will reset. When it does, can you handle a 50% or 100% increase in your monthly payment? Do you know what your margin is? If not, invest an hour with your mortgage professional and find out all of your options. Don't let foreclosure sneak up on you. Take the necessary steps this summer to protect your biggest investment. For anyone considering purchasing a new home this summer, schedule a credit review right away. With the right credit score, buyers can take advantage of the increased inventories and lower prices available in many markets. Don't let the summer selling season pass you by.

If you have any questions, call 201.830.1800 for a free consultation. Together, we will make sure that you're taking advantage of every opportunity available to address your changing financial goals and needs!

Leter to Clients - Interest Rate Update

June 22, 2007

Dear Valued CMG Client,

When inflation fears recently led central banks in New Zealand and Europe to suddenly increase their short-term interest rates, the repercussions were immediate. Interest rates soared around the globe - especially in the US. According to the Chicago Tribune, mortgage interest rates have reached their highest levels in nearly a year! In fact, Freddie Mac recently reported the fifth consecutive week of rate increases across the board since May 15th.


If you or someone you know is considering a new home purchase or refinance in the next 12 months, I urge you to investigate all available options now instead of waiting any longer. Yes, it's true; mortgage interest rates are currently under 7.00%, but they may not remain there for long. As history has demonstrated, a rapid rise in interest rates is sometimes a precursor to even higher rates in the coming months. In 1993, interest rates on a 30-year fixed rate mortgage jumped from 6.69% to 8.23% in just five months. With this latest surge in interest rates, can you really afford to wait any longer?


Remember, mortgage rates are based on mortgage-backed securities, which investors buy and sell like stocks on the stock market. If returns are more attractive in other countries and markets, investors and their capital will follow - and rates will likely increase. It's that simple. Combine this with the present turmoil of the post subprime housing market, and it really does make sense to at least consider all of your available options now. Honestly, if this sudden surge in interest rates was the only sign of a changing market, I wouldn't waste your time. But, growing concern about inflation and how the Federal Reserve might respond, combined with increases in housing inventories, decreases in home values in many neighborhoods, and the tightening of credit standards and guidelines is just too much evidence to ignore.


While no one can predict exactly what will happen, including me, experts in the bond arena have expressed concerns that rates will continue to increase throughout the rest of the year. Some believe that the Federal Reserve will be forced to raise interest rates prior to year's end. This would increase interest rates for existing Home Equity loans, credit card loans, and potentially existing ARMs. Find out how these and other changes could affect your financial situation.
Please contact your CMG Mortgage Consultant at 201.830.1800 today for your no cost, no obligation analysis of your current mortgage position to see if we can save you money and protect you from a potential increase in monthly payments.

Sincerely,
Rich
Richard C. Bouchner Principal