FORECLOSURE, ADJUSTABLE RATES AND THE SUBPRIME MARKET:

FACT OR FICTION

Lately you cannot avoid hearing about the dramatic rise in foreclosures in this country, and the fall of the sub-prime market.  I am going to try to break down what is happening for you in as simple a way as possible.

What is the subprime market?:

The sub-prime market deals with non-conventional loans, or loans for borrowers with lower credit scores, usually below 620, borrowers with higher debt ratios, prior bankruptcies, mortgage lates etc.  It is a market that was developed in order to help more homeowners achieve their dream of homeownership.  Because these borrowers are a higher risk, their loans normally come with higher interest rates, or short term fixed rates designed as what they call a band aid loan.  Sub-prime loans always offer a regular 30 yr fixed rate, however offer borrowers usually a full point lower if they are willing to take a 2 or 3 yr fixed loan.  Borrowers take this loan with the understanding that it offers them a lower rate and payment in the beginning of the loan while they try to repair their credit and establish a good payment history in order to raise their credit.  It is not designed to be the end all be all loan, it is simply to get them into the house, or allow them to refinance despite their poor credit, with the understanding that once they get their credit back up to par they will refinance into a 30 yr fixed mortgage.  Many companies including mine offer a no closing cost refinance once the borrower has cleaned up the credit!

Here is where lenders are getting a bad name.  I am not suggesting by any means that no fault lies with some lenders.  There are always going to be lenders who get involved in fraudulent type loans, or who do not have their borrower’s best interests at heart.  I believe these people make up a small percentage of the lenders out there.  Homeowners have to sign many documents before they are given keys to a home explaining the type of loan they are getting, the terms of the loan, and if it is an adjustable loan how and when it will adjust.  Typically they sign these documents at the beginning of the loan process and again at the closing table.  The forms are in clear and plain English and bold type stating this information.   

Bottom line is the homeowners should always take responsibility themselves to insure that the loan they are taking is good for their needs.  Or if they are unsure, or want a second opinion, they should look for the advice of an attorney.

As a lender I can tell a homeowner the max amount they qualify for.  However this payment might be too much for the homeowner too afford even if my bank will give them the loan on the higher amount.  This is where each homeowner should sit down and prepare a budget for themselves and truly go over all of the costs of homeownership, as well as their existing current bills.  Many things should come into play including, what it will cost to furnish the home, what repairs if any need to be done and what the expenses for that will be, what repairs might come into play unexpectedly down the road.  Sometimes it is a matter of borrowers simply wanting to buy more than they can really afford and hoping they will figure out how to pay for it later. Haven’t we become a buy now pay later society?

The banks, and financial planners recommend that you have at least 2-6 months worth of your total payment in reserve as a safety net.  But if you experience job loss, health issues, unexpected repairs or a combination of these things, this money will be gone in a hurry.  If you are a borrower who bought a house with no money down you do not have any equity to turn to either in a situation like this.  I advise all of my clients to sit down with a financial planner as soon as possible to go over their budget and start saving immediately.  Pay yourself first.  Just because the bank says you only need 2 months worth of savings, doesn’t mean it will be enough to get you thru a crisis should one occur.

My point is this, banks/mortgage companies should be regulated to eliminate fraudulent mortgage practices, however the public should also start holding itself responsible for irresponsible spending habits and forgetting the most important rule:  Pay yourself first!