Sub-Prime Loan Market: What you need to know

The headlines are once again full of news from the mortgage and real estate front...and this time, the "subprime meltdown" is taking center stage. What exactly is going on, and what does it mean to you?

A "subprime" home loan is a loan where the client has some significant credit issues, or was otherwise unable to qualify for a standard, conventional loan. Due to the fact that these loans tend to be quite risky for the lender...they also bear higher interest rates to match, as well as often being adjustable rates that likely have recently hiked sky high, not to mention the steep prepayment penalties they generally carry.

These loans have been around for years - so why all the drama now?

Many subprime and other adjustable home loan rates have moved dramatically higher, due in part to the Federal Reserve Boards recent rate hike cycle. So as these rates are adjusting higher - and the payment right along with it - the homeowners are finding that they are unable to keep up with the dramatic increase in payment.

In the past, homeowners in this situation would simply throw the house on the market, realize enough of a profit to cover any prepayment penalties, and literally move on. But the soft real estate market isn't making this quite so easy any more - houses are not selling as quickly, and the home appreciation rates enjoyed in the past have moderated.

So the subprime homeowner is stuck - and many of these homes are falling into foreclosure, causing even more problems. As more and more loans are defaulting, mortgage lenders are forced to tighten up their lending standards across the board in response...making it tougher for a troubled homeowner to even refinance to get out of trouble. Many subprime lenders are feeling the pain, and in some cases, actually being forced to close their doors as they are hit with all the defaulted loans and foreclosed properties coming back home to roost.

How does this impact you?

In the short term, home loan rates are benefiting, as the stock market is taking a beating, causing money to flow into Bonds and Mortgage Backed Securities, which benefits home loan rates. But the longer term picture may spell higher interest rates ahead, as lenders have to absorb the cost of the loans that went belly-up, combined with the cost of increased compliance and accountability standards.

Now in many cases, the advice and loan strategy given to the client was perfectly appropriate for the client at the time they took out the loan...but the "perfect storm" of colliding economic events may have just worked against them. Yet unfortunately, many homeowners are paying a very steep price for what may have been poor advice and counsel given them at the time of their home purchase or refi. Now more than ever before, it is clear that it pays to work with a true professional, especially when your home is on the line. If you've ever thought it's too expensive to work with a real professional...just wait until you work with an amateur. The price paid is clear - and in this case, it's a very painful one.

Because of these events, credit and lending standards are tightening across the board, so it's a great time to get a "financial check up" - both you personally, as well as your clients, friends, family members and coworkers - even if they are not immediately in need of any home loan financing.

You know that I want to build relationships for the long run, not just to provide a "transaction" - so although you may not have a need for my team's home loan services at this time, I'd like to invite you to contact my friend and SCV Team member Adam Ford of the Mortgage Advisor's Group in Valencia (661-254-3744 x19) for a review of your current credit and financial situation. There may be recommendations he can make now, that will ensure you are in the best possible shape to obtain the most favorable financing terms when the need does arise.

Feel free to forward this newsletter directly, or print out copies for your clients, friends and coworkers who are asking about the headlines. As always, simply give me a call or email - I am always glad to hear from you, and happy to answer any questions regarding this matter or any other way we can be of service to you.

A couple of other tips:

Avoid getting a sub prime loan: It is more important than ever to have good credit as you have fewer loan options so be prepared, give my friend Adam a call if you have had ANY credit issues long BEFORE you get into escrow that way we can help you solve them or hire a company to help you with your credit issues. A recent collection can lower your scores by as much as 100 points.

Follow the “RULES” of credit: Never close an account, Never pay a collection off UNLESS THEY WILL DELETE IT (remember they only want the money), Never allow your credit card balances to go above 50% of the limit, Avoid finance accounts (no interest no payments for a year) they are have the highest default rate consequently they effect the credit scores the most.