Monday, August 6, 2007

August 6, 2007 Current State of Mortgage Financing...What's Going On?

August 6, 2007 - Current State of Mortgage Financing...What's Going On?

Anyone watching or reading the financial news over the last few days and weeks has seen a lot of angst and consternation over the state of the mortgage industry. In fact, one of the larger lenders in the US, American Home Mortgage, was forced to shut down operations last week. But why? What is happening, and most importantly, what does all this mean to you? Let's unpack the definitions and details, so that you really understand the truth behind the headlines.

Over the past several years, many loans were made to homeowners with somewhat non-traditional or "non-conforming" situations, be it a poor credit history, inability to document income, or any number of factors that do not fit within the traditional "box" for home loans. These loans are often called "Sub-Prime", or "Alt-A", meaning that they were somewhat riskier in nature than A credit, prime, or traditional loans. Another type of "non-conforming" home loan is one where the credit and income might be perfectly fine, but the loan amount is higher than $417K, which is the current maximum loan that can be done using pools of money from mortgage giants Fannie Mae (FNMA) and Freddie Mac (FHLMC). If the loan amount is higher, it can certainly be done - it's called a "jumbo loan" - but the end money comes from private institutions, not from the large government sponsored entities of Fannie and Freddie.

Most non-conforming loan product rates popped significantly higher in the last week. Here's the scoop.

The end investor for Subprime or Alt-A loans will charge a premium for taking on a pool of these loans, because they know that traditionally, they might have a higher rate of default and delinquent payments within that risky pool. But lately, default and foreclosure has been on the rise - partly due to the fact that with credit tightening and a soft real estate market, many troubled homeowners are unable to refinance or sell in order to get out of trouble. So now, these end institutions are demanding a much higher "risk premium" for taking on these pools of loans, as they see the rates of default are climbing higher.

But since these institutions are purchasing these pools of loans sometimes months after the borrower has actually closed at a given rate, this increase to the risk premium means that instead of paying $101K for a $100K loan that will bear interest, they may only be willing to pay $95K for that $100K mortgage to account for the risk. Multiply that times thousands upon thousands of loans...and you have millions upon millions of dollars in loss for the company trying to sell the pool at a much lower price than they were expecting. This is called a "liquidity crisis", and is exactly what happened to American Home Mortgage - there was no mismanagement, but they simply got caught holding too many "hot potato" loans, forced to sell them at massive losses...and eventually they had to make the decision to close the doors and stop the bleeding.

Further, even when a lender is able to take some losses, they may be subject to a "margin call". This means that as their losses and risk premiums increase, the value of their loan portfolio decreases. As the value decreases, the credit lines that are secured by those portfolios begin to issue margin calls as the value of the asset that they are secured on is now diminished. This is exactly like margin calls in the Stock market. If you have a loan against a Stock that is losing value, you will get a "margin call" and need to pay down the loan, as the underlying Stock is losing too much value to be considered adequate collateral any longer. So for the big lenders, as their portfolio is losing value due to increased risk premiums and losses...the margin calls start coming in, and they are required to pay down their balances. In turn, this means that they have less availability to fund their new loans, which then exacerbates the problem.

In response to seeing this situation play out in the demise of American Home Mortgage, lenders of other non-conforming loan products increased their interest rates dramatically almost overnight to be better prepared - and likely over-prepared - for increased risk premiums down the road. Even though loans above $417K are not presently suffering from increased delinquencies like the Subprime and Alt-A loans are, these rates popped higher as well, because they are being purchased by smaller private entities that can't afford to take on any margin of risk.

What happens next, and what should you do now?

The present situation will likely settle out over the coming year, and the rates on products that have moved so significantly higher now should trend lower down the road as delinquency rates stabilize. But here are a few important things to do right now.

First, even if you are not presently in the market for a home loan of any type, call me to make sure that your credit standing is as solid as possible. Many people I talk to about home loans didn't expect they would have a need, and didn't plan in advance to ensure their credit would qualify them for the best possible financing. With no immediate need for a home loan, time is on your side...why don't we take a few minutes together and just make sure you are prepared, should a need arise down the road?

Next, if you are in the market for a home loan, or know someone who is - know that now is time to be working with a real qualified professional who can keep you informed of changes in the market and get your loan funded quickly. Now is NOT the time to be playing the risky game of trying to scour the entire nation to find someone who promises to save you a paltry amount on costs, or deliver a rate that seems too good to be true. Your home and your financing are just too important, and times have changed. I am here to help and advise during these volatile times - and would welcome calls from you, your friends, family, neighbors or coworkers.

Lloria Ross

First Horizon Home Loans


How to Buy Your First Home the Easy Way!

How to Buy Your First Home the Easy Way!

Avoid 10 Common Potentially Devastating Mistakes First Time Home Buyers Make.

If you follow these (ten) 10 suggestions, with the help of the right real estate professional, you’ll make a good sound business decision that you’ll be happy and proud of for years to come. Many home buyers do very little research before “diving in” and investing their hard-earned money. Before doing that, doesn’t it make sense to be as informed as possible? This article is designed to help you avoid 10 common, critical mistakes many home buyers make. If you follow these (ten) 10 suggestions, with the help of the right real estate professional, you’ll make a good sound business decision that you’ll be happy and proud of years to come.

1. Inspect, Inspect and Inspect- Go over the inspection report with a fine tooth comb. Make sure the report was done by a professional organization. For condo purchases, go over the by-laws, and association fees. Don’t take anything for granted... inspect everything!

2. Imagine the Property Vacant- Your furnishings and decorations will be the

ones filling this new residence. Don’t be swayed by beautiful furniture ... it

leaves with the owner.

3. Income Plus Lifestyle equals Mortgage Payment- Sit down with a competent real estate professional and honestly discuss your income level and living expenses. Take into account future considerations like: children, add-ons,

amenities or fix ups. Your dream home is certainly worth a sacrifice but don’t mortgage your entire future.

4. View Several Homes- See at least 3-5 properties. Don’t move on the first

property you see but..don’t move too slowly either. With your agent’s help,

you’ll be able to view enough properties to get a good overall perspective of your

market. And when you find the right property, all the leg work will be worth it.

5. Utilize Your Team- By aligning yourself with the right real estate professional, you’ll have an entire team working for you. Top real estate professionals have lenders, title reps, inspection teams — an entire group of trained professionals to make the whole buying experience simple and easy for you.

6. Be Columbo— Check out all your costs and expenses before your sign: utilities, taxes, insurance, maintenance and homeowner dues, if applicable. Make sure all utilities are on (gas, electricity, and water). SO you can inspect everything in working order. Ask lots of questions and be very detail conscious.

7. Do a Final WaIk-Through- Visit the property after all the furnishings have been moved out to be sure there are no surprises. Be absolutely positive the property was left exactly as you had agreed upon final tile contract. Many times, things are unintentionally overlooked that could have been spotted in a final walk_through.

8 Plan for Flexibility- Closing dates are not written in stone. Allow for contingencies and have a back-up plan. If you or the sellers allow a little more time to conclude the final arrangements, don’t let these delays upset or frustrate you. These types of circumstances are not uncommon in a real estate transaction.

9. If It’s Not In Writing, It Doesn’t Exist- All promises and discussions are to he in writing. Don’t make any assumptions or believe any assurances. Even the best intentions can be misinterpreted. Have your real estate professional keep an ongoing log (in writing) of all discussions, arid get the seller’s written approval for all addendums.

10. Loyalty Breeds Loyalty- Be open, honest and up-front with our team. Hard feelings and disloyalty will cause headaches, delays or may even keep you from getting into the home you worked so hard to locate. Take the lime to select the right team in the beginning and your first home purchase will be simple. easy and profitable experience you’ll have fond memories for years to come.

Our hope with this article has been to educate you and help, you avoid the pitfalls many home buyers go through. We hope you found the ideas valuable!

Compliments of: Cindy Strobel, Broker/Owner

Resource Realty Services

Your Name is Being Sold - Take Action Now!


Alert to Hanover, Henrico & all residence! Your Name is Being Sold - Take Action Now!
Here’s breaking news you need to know … and you need to let all your family and friends know right away as well.

Your information … a hot commodity

Having credit checked is an important and necessary step in the home buying process. But very few people realize that each time their credit is checked, the “inquiry data” that the credit bureaus (Equifax, TransUnion, Innovis or Experian) have on file have now become a commodity. This information is being sold by the credit bureaus to other lenders…and also to companies that sell and resell the same names and personal information.

That’s right – the credit bureaus have found a way to increase their revenues at your expense….and without your permission.

These “inquiry leads” include name, address, phone numbers (including unlisted), credit score, current debt and debt history, property information, age, gender and estimated income. They are marketing personal, confidential information to competing creditors…and making millions. Your privacy is being sold, not just once, but over and over again.

And lenders that purchase these leads at a premium will then do everything they can to recoup their investment and turn a hefty profit. Super sneaky bait and switch tactics are being used to lure clients away from their reputable lender. Clients have even been called by disreputable lenders and told that the lender they had been speaking to previously “passed on” the information to them, because they knew that they’d be able to offer much better interest rates and terms. Ouch!

Just Say “No”

The consumer credit reporting industry has provided a way to “opt out” and remove your name from these lists. You can contact them by phone at 1-888-567-8688 or online at you must opt out at least 48 hours prior to having your credit checked to make sure it is processed in time. You can choose a five year or lifetime option, and the lifetime option does require a signed form. If a credit report needs to be run prior to the 48 hour waiting period – at least you are aware and informed, and can be on the lookout for suspicious phone calls or mailers from someone who has purchased your data.

The good news is by opting-out you can make it stop right away and protect yourself from “pre-approved credit offers” arriving via mail, which is one of the leading causes of identity theft in the US.

Take Your Privacy Back

You certainly have the right to shop for the best professional to meet your lending needs – but this should be done when and how YOU choose, not being done without your consent or permission. In fact, we even provide a “Shopping Around” guide, just email your request for the free guide to so that you know how to make educated, informed choices when selecting your lender. Contact us if you’d like a copy sent to you right away. But looking around should be on your terms, not being done as a sneak attack, because they think you won’t know better. And unfortunately, these unsolicited marketing tactics are a nuisance and intrusive, but quite legal.

Take your privacy back. Take five minutes right now – opt out, and pass it on. Refuse to be a part of this system.

Compliments of Lloria Ross

First Horizon Home Loans