March 20, 2007
The Subprime Dilemma-These loans have been around for years-so why all the drama now?
Many subprime and other adjustable home loan rates have moved dramatically higher, due in part to the Federal Reserve Boards recent rate hike cycle. So as these rates are adjusting higher-and the payment right along with it-the homeowners are finding that they are unable to keep up with the dramatic increase in payment.
In the past, homeowners in this situation would just throw the house on the market, realize enough of a profit to cover any prepayment penalties, and quite literally move on. A soft real estate market isn't making this quite so easy any more-houses are not selling as quickly, and the home appreciation rates enjoyed in the past have moderated.
So the subprime homeowner is stuck-and many of these homes are falling into foreclosure, causing even more problems. As more and more loans are defaulting , mortgage lenders are forced to tighten up their lending standards across the board in response...making it tougher for a troubled homeowner to even refinance to get out of trouble. Many subprime lenders are feeling the pain, and in some cases, actually being forced to close their doors as they are hit with all the defaulted loans and foreclosed properties coming back home to roost.
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The Perfect Storm? - Has the real estate market just had the perfect storm? Let's take a look at what's happened. It's been five years since the beginning of the real estate boom which heated up after 9-11. It has now also been over one year since the boom came to a halt. When will the next hot real estate market occur? The consensus is that it will be at least at a year before we start seeing price appreciation again. This week we will start a two-part series that will analyze the components that affect this market. The first will deal with the components of the rise -
· Demographics-A boom cannot happen without demand. The 1990s was not the best decade for the housing market and as it ended there was pent-up demand. At the same time, the population of the nation was experiencing an immigration boom as well as the effects of the maturing of the baby boomers.
· Interest Rates-After 9-11, the slowing of the economy and the response by the Federal Reserve brought both short-term and long-term rates down to record levels. Lower rates helped qualify more borrowers.
· New Programs-The aftermath of the savings and loan crisis of the late 1980s brought among other things, an explosion of the secondary market. This brought more programs to the consumer, including no-money down programs, interest only, stated income, option adjustables and more.
· Loose Credit Guidelines-There was a concerted effort by the government to bring homeownership to as many as possible. First time buyer and low-to-moderate income programs proliferated-even into the subprime world which was part of the "new program" revolution.
Homes skyrocketed in value. This caused even more demand as investors poured in with a "get rich quick" attitude. When the stock market experienced this around 2000, the Chairman of the Federal Reserve called it "irrational exuberance." Next week we will talk about what factors have changed.
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Disclaimer: The information contained in this newsletter has been gleaned from various sources and is intended to be current and accurate, however we cannot and do not warrant or guarantee as such. This newsletter is for informational purposes only and is not intended to be, nor should be considered as, investment advice. It does not take into consideration the financial circumstances, needs or investment objectives of any specific person who may receive this newsletter. Individuals should seek financial advice with regard to specific circumstances before making any investment decision.
Copyright 2007 Ann Arbor Mortgage Company, LLC
©Copyright 2007 Ann Arbor Mortgage Company, LLC
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