Subprime loans are a problem
First,
subprime loans are loans that are NOT run through Fannie
Mae and Freddie Mac. They are typically given to customers that have poor credit or other issues like income they cannot document.
The other problem with these loans, and I know this from working with these lenders in the past, is that they usually push Adjustable Rate Mortgages (ARM). The favorite is the 2/28, which means that for 2 years, the rate is fixed. After that, it can adjust. The real problem with this is when there is a 3-year
pre-payment penalty on the back side. That means that for one year (month 25 to 36), you MUST pay the higher payment, but you cannot refinance without paying a huge penalty.
These loans serve a purpose. I have done them and then worked with the clients during the two years to fix their credit and get them into a conventional loan before the interest rises.
That is the main problem with them. You have lenders and brokers with a product and
un-informed consumers. To many (not all) of the lenders and brokers, these are transactions, with the borrower left to fend for
themselves.
Here is an article that points out these problems from a national
economic level.
http://brokerwatchdog.com/2007/02/26/signs-of-a-subprime-mortgage-market-earthquake/Labels: Buyers, General Real Estate News, Interest Rates, Subprime
SweetScooterBicks: It's Pretty Soon To When I Get Here
I am very sorry that the posts have been few and far between. As you may (or may not) know I am in school getting an MBA, and sometimes we adults have to play the little game of "intentional neglect."
One of my favorite people in the whole world and one of the most talented writers I know personally (and I know
soooooo many!), has finally decided to start a blog. This post and this link are
completely unrelated to real estate (except the lady the wrote on the other blog actually worked for a real estate agent in a past life), we all need a good laugh sometimes.
The following link is a must read if you simply want a pick me up and to have a good chuckle.
SweetScooterBicks: It's Pretty Soon To When I Get HereCheck out her blog.
John
Labels: Personal
First Time Home Buyers
I found the following list on Realtor.org today. This is a good, quick-hit list of stuff for first time
home buyers to consider. It is not comprehensive, but it is a good place to start.
Of particular importance (of course, I would think so) is that they should get
pre-qualified. This process can catch all sorts of issues, from credit problems to problems sourcing the down-payment money.
Here is the listing:
Daily Real Estate News February 6, 20076 Ways First-Time Buyers Can PrepareA cooling housing market gives buyers, especially first-time buyers, more opportunities to snatch up a good deal. But just because there are good deals, doesn't always mean buyers are ready to make the leap.These six tips will help prospective buyers find out if they are ready for homeownership. 1. Take a first-time home buyer class. It will make repairing a credit score and shopping for a loan less stressful.2. Be conservative. Borrowing too much can mean stretching and even sacrificing — to the point that it’s hard to even keep a six-pack of beer in the fridge.3. Organize documents. First-time buyers should keep a pay stub, W-2, and bank and retirement account statements on hand to expedite the loan application process. 4. Get pre-approved. Before starting the homebuying process, consumers should get pre-approved by at least one lender. Being pre-approved won't lock buyers in to a loan but it may save them the heartache of falling in love with a home they really can't afford.5. Play house. Every month, prospective buyers should bank the amount that they'd have to pay if they owned a home. It's good practice so they'll be ready for the real thing.6. Consider all the costs. It's not just a mortgage payment they have to worry about. Repairs, assessments, and other costs of homeownership can add up quickly.Source: Star-Tribune, Kara McGuire (02/02/07)
Inman.com has a Wiki
If you are unsure what a "wiki" is, take a look at
Wikipedia. It is user controlled content. The users of the service write the content.
Inman.com, a nationally known real estate information service, has a new wiki. It is located at
Inmanwiki.com.
I just added the following information on Adjustable Rate Mortgages this morning.
== ARM (Adjustable Rate Mortgage)==
An adjustable-rate mortgage, aka ARM, usually has a fixed interest rate period, followed by a period of fluctuating interest. The fixed period can range from as short as one month to as long as 10 years. ARM's are always linked to an index. These indices are usually published numbers such as the LIBOR rate, treasury bill or bond rates, or the Cost-of-Funds Index. The lender then adds their margin on top of this index. A good place to look at historical index numbers is [http://www.forecasts.org Forecasts.Org].
These loans act just like fixed rate loans during the initial fixed rate period. However, as soon as the loan begins to adjust, things can change and quickly. Lenders differ on margins that are added to the index rate and they differ on how fast the rate can adjust. Recent trends though show that the rates can go to their max rate on the first adjustment, which can almost double your interest rate when you move from the fixed period to the adjustable period.
The strategy behind using these loans are to either maximize monthly cash flow or to get the best rate if you know that your time in the home will be limited. These loans are less popular in times with an inverted yield curve (see [http://money.cnn.com/markets/bondcenter/index.html BondCenter on Money.cnn.com]), because they offer rates that are close to longer term fixed rates, so the risk is not worth the reward. With an inverted yield curve, the short term rates, carry the same or higher risk as the long term rates. Normally, the yield curve shows that rates are lower with shorter terms, which makes sense. If I was to lend you money today for 6 months, I will not loose much buying power on that money over six months, so the interest rate I will charge will be less. However, if I loan you money for 30-years, the money will have significantly less buying power 30-years from now, therefore, I need to charge a higher interest rate. This is inflation risk priced into interest rates.Labels: Buyers, Financing, General Real Estate News, Interest Rates
American's no longer saving for a rainy day!
I heard a story on the radio this morning and found an article on
VOA NEWS. Last year, the national average personal savings rate was at a 70-year low of NEGATIVE 1%. That is
absolutely astounding that on average, a person earning $80,000 would have spent $80,800. They are going in the whole. I am not sure if this factors in retirement accounts like 401K's, but I know of many people that have taken loans against those retirement accounts.
This underscores a post I made in the past regarding saving some money in a liquid side account and calling it you "Mortgage Reduction Account". I would recommend this instead of sending extra money to the lender. This side account is liquid and can be a safe account (like a simple savings account, money market or CD) or something more aggressive. But it is yours! And, it increases your savings rate.
Life happens and this average American that this article talks about is going to be in trouble when it does, because they will have no choice but to go even
deeper into debt.
Labels: Buyers, Family, Financing, Mortgage Planning
