No doubt, you have heard about the crisis in the subprime mortgage market by now. Subprime mortgage lenders are truly in a tough situation. According to the New York Times over 20 mortgage lenders have already shut down their operations for good. And, many of the top 25 lenders in the nation from 2006 are reporting serious losses, filing for bankruptcy protection, or looking for another company to buy them.Bill Dallas, former CEO of Ownit Solutions has been quoted as saying that all subprime lenders will be severely hurt by the current market situation. He also stated that 10% – 40% of all borrowers will be affected by tightening credit standards that lenders are adopting in light of this crisis. Anyone looking for a mortgage in the near future will notice tighter qualifying criteria and fewer products available to them.
What happened?
Over the past several years housing prices in the US have been soaring. It has benefitted almost every homeowner in the form of additional equity in their property. Over this time period many lenders had relaxed many of their underwriting guidelines and introduced and/or expanded mortgage product offerings that did not seem as risky as long as the value of homes continued to rise. Some of these products include interest only loans and loans with no down payments – even for applicants with less than perfect credit. Even if the borrowers were in trouble, the increase in equity would allow them to refinance or at least sell their homes for more than they borrowed.
When a mortgage is originated, prime or subprime, the loan is typically sold to a company that combines these mortgages in big pools of loans and then markets them as securities on Wall Street. This is the backbone of the mortgage system in the US and allows lenders to constantly have enough money to lend to borrowers. But, with up to 15% or more of these loans now in default, many of the Wall Street bankers are sending these loans back to the lenders and demanding them to re-purchase these loans. This has crippled many of these lenders.
In addition, mortgage lenders traditionally have warehouse lines of credit from the major commercial banks. This allows them to fund loans until they can be sold to the Wall Street Bankers. Many of these commercial banks have closed or reduced the amount of credit extended to the subprime lenders. This caused them to no longer be able to fund any more loans.
How will this affect my home and my mortgage?
If you are current on your mortgage and do not plan to move or refinance in the near future, the answer is it will not affect you.
If you are planning to move or refinance in the near future you may notice that the underwriting guidelines for many mortgage programs (both prime and subprime) have been tightened. For many people this will simply mean that they need to provide more documentation than they have in the past few years or certain programs may not be as readily available. Many of the interest only mortgages and no income verification loans may require larger down payments that before and/or higher credit scores. But, the impact for you will be limited.
If you are currently late or in default on your mortgage you may be impacted. In the past, if you were late or in default on your mortgage you could always refinance to a subprime mortgage program. Since the value in your home was always rising, there was usually an option for refinancing. Now, with home values flat, or in some cases declining, and the current crisis, there are far fewer options for you. Please contact me, or another experienced loan officer right away, to see what options are available to you.
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