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Lately it seems you can’t turn on the news without hearing a story about the real estate or mortgage industry. Most of it evolves from loans that were given to people with bad credit. These loans are often referred to as subprime loans. Up until this year, lenders were willing to give subprime loans with little or no money down. Subprime loans are given at higher interest rates than to people with good credit. On paper this looked great for everyone. The people with bad credit were able to buy homes and lenders were making more money in interest. Giving loans to people with less than perfect credit is nothing new. However, in the past subprime loans required a more substantial down payment. Of course, people with bad credit typically don’t have a lot of money saved. But with lenders loosening their restrictions on down payments, a new era of giving loans arose. Unfortunately, so did the problems. To make matters worse, lenders started giving loans based on stated income. In other words, they didn’t require documentation to prove how much money the mortgagee made, they just asked them. Soon, people with bad credit and no equity in their homes began leaving their homes in droves, letting their lenders foreclose on them. This resulted in the market getting flooded with homes.
Economics is all about supply and demand. The more supply, the less demand. With the abundance of foreclosures, people with good credit are feeling the crunch. Homes are now worth less because of so many available for sale. To make matters worse, lenders are requiring larger down payments and interest rates have been rising. All of this has led us to where we are now.
Another bad situation that has came to life is this. A common practice of homeowners, even ones with good credit, is to use credit cards as a way to finance things they can’t afford. In the past this wasn’t much of a problem, because their home went up in value and they refinanced it to pay off their credit cards. Unfortunately, with the recent drop in home prices and the tighter lending restrictions, many of these people are being turned down when they go to refinance. Carrying large credit card balances results in your credit score to drop. This makes it even more difficult for them to do anything. Which brings us to the latest trend, people with good credit are beginning to struggle.
So whose fault is all of this? Well, the mortgage brokers are taking a lot of the heat. But in all fairness, they are probably the least at fault. First of all, it’s not the mortgage brokers that decide who qualifies for a loan. It’s the lenders or banks that set the guidelines and ultimately approve a loan or not. Is it really fair to expect a mortgage broker to tell a person with less than perfect credit, “I’m sorry, while my lender is ready to approve your loan, I don’t feel right in doing so, you really should work on improving your credit first”? In a perfect world that would be great. However, mortgage brokers like everyone else have bills to pay. They pay those bills by securing loans for people, not for being a good person. However, this is not to say that there weren’t a few mortgage brokers pushing loan programs that weren’t in the best interest of their customers. Such as some of the new exotic adjustable loans sold to people that weren’t made fully aware of how their monthly payments could change drastically. Even those mortgage brokers probably figured they could refinance at that point. Certainly they didn’t know what was about to come.
So where does all of this leave you now? Well, much of the smoke is beginning to clear from the subprime fiasco. Some of the smaller lenders have gone out of business. Larger lenders have written off their bad debt and are starting anew. Albeit not like several years ago, just more like they have over the last several decades. Now the lenders are investigating as to how much money you make instead of asking. The government is getting involved as well. They are doing whatever they can to jump start the housing market. Also, the lenders realized that those exotic loan types that allowed people to buy more expensive homes, with initial low payments, hurt them as much as their customers. As a matter of fact, you don’t have to worry about getting pushed into an adjustable mortgage these days, because the 30 year fixed rates are lower than the adjustable loans. It didn’t take long for the lenders to figure out that the only ones getting fooled by those exotic adjustable loan products were themselves, when they were the new owner of a house their customer couldn’t afford. But be rest assured, the basic adjustable will begin to come back and so will some more creative ones after that. For some people they will be the loan to go with. After all, if you know you will be moving in three years and you can get a 5 year adjustable at a lower rate than a 30 year fixed, it probably makes sense. For now, you’re better off with the 30 year fixed because it is lower.
The bottom line is, no one is going to look out for you, better then yourself. Ask questions and educate yourself. Some people feel what they don’t know won’t hurt them. These are the same people that had their mortgage payments go up substantially this year and guess what, it hurt!
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