I've got two more terms to be added to everyone's "Everything you didn't want to know about lending in 2009 because you were afraid to ask" vocabulary list: "Alt-A" and "Option ARMs." Don't know what they are? Well, you will, soon.
It seems that a second mortgage shock is heading for the economy at high speed and without brakes. That's right, just as many of us suspected from the beginning, the first "sub-prime" bailout was only the beginning salvo in a battle to protect us from the bloodiest and most damaging financial crisis of our lifetimes.
The initial 700 billion approved by the congress last fall will only be a down payment on a whole new wave of loans that are apparently in danger of defaulting behind the sub-primes..."Alt-A" and "Option ARMs."
That's right, we're not done. I'm not talking about a measly little 34 Billion to bail out the big three auto manufacturers; we're talking about needing perhaps another 1.5 TRILLION dollars of additional bailout money that will become necessary to prevent the U.S. lending industry from complete collapse.
Yep, the silliness didn't end with the sub-primes, a whole new wave of loans that had initially lured borrowers in with tempting teaser rates are due now to "reset" behind the sub-primes. What might have been a nice comfortable mortgage payment of say, $800 a month, is, in all likelihood, going to change to something on the order of double that. Many, if not most, borrowers finding themselves in this situation will not be able to save themselves, so stand-by.
What? Are you kidding? It's sad but true. Even so-called "highly qualified" borrowers got sucked into the trap. But how did this all happen?
It's simple really. When the collateral value of an asset soars through the roof, the viability of the borrower becomes increasingly less important. Or so the argument goes. When housing prices just kept climbing higher and higher, borrowers believed that refinancing before their adjustable loans reset was a normal course of business and an option they fully expected to exercise. In other words, "Alt-A" and "Option ARM" borrowers believed they could refinance or resell their properties (at a profit - of course) before the higher payments on their loans became due.
But then the market hit the skids. Oops.
In a strong market, even the sprinkling of bankruptcies and loan defaults that would normally occur, didn't matter to the banks either because, chances were that the resale value of that foreclosure might actually exceed the original principal value of the loan. At the peak of the housing boom, a poorly qualified borrower became less important. Wow. That's how so-called "liar's" or "stated-income" loans actually made it through underwriting because the borrower had become a far less critical variable in the lending equation. Although I wrote about this phenomenon last year in my "All Bow to the Almighty FICO" and "Got a Job? Decent Credit? You can buy a House!!" articles, I never in my wildest dreams thought that what we're looking at now would ever actually come to be.
So there we have it. Now what?
Well, lending has tightened. Buyers who are in the fortunate position to be able to purchase now are enjoying spectacular deals, but with a lot more money down and with a far higher level of underwriting scrutiny than perhaps ever before. You'll need a little cash (sometimes more than a little) and your credit score will need to be a smidge higher than back in the heyday if you want to buy. But what incredible buys there are now! I know I keep saying so, but the situation just keeps on getting better for buyers out there.
Recently I was very lucky to have found a bank-owned property that had, in '05, sold for $495,000. My buyers just closed and walked away with that very property for $260k. That's nearly half what it had been, and there's a lot more out there where that came from, believe me.
Spectacular opportunity for buyers aside, many still seem, understandably, a little gun-shy about pulling the trigger on a Real Estate transaction. With what may be a greater than two-year supply of inventory languishing on the open market, the current glut of homes for sale seems destined only to continue to grow, and when a house won't sell, what's an owner to do? One option may be to put the property on the market for rent. The following list is a sampling of companies available to help manage homes for rent in our vicinity:
- REMAX Sunset Realty / Long Term Property Management - 541 536 0117
- Village Properties - 541 593-7368
- La Pine Property Management - 541 536-1114
- Accord Property Management - 541 536-1165
- Ernst Brothers LLC (Gilchrist / Klamath CO) - 541 433-2610
As you may have noticed, Sunset Realty is happy to announce that we have added our company to the above list and will become operational by mid-January offering long-term property management services in addition to an already established vacation rental and RE Sales divisions. All of the above local companies have excellent reputations and we look forward to working with them in the growing rental market to come.
In the mean time however, we in the industry have got a lot of houses to sell and buyers out there couldn't have better opportunity. Oh, and lets not forget interest rates. Last fall I mistakenly proclaimed that if you hadn't bought by then, you might have lost tens of thousands of dollars due to rising interest rates. I'm very happy to say, however, that rates are now back down and could conceivably hit the mid fours! Considering all the trouble we've gotten into with adjustable loans now coming due, how's a nice thirty year fixed sound at 4.5%? Let's see... buys of the century, record low interest rates.. Hmmm... sounds pretty great to me.
Fred Jaeger is a licensed Oregon Real Estate Broker and an e-PRO Certified Realtor® affiliated with RE/MAX Sunset Realty Sunriver/La Pine. He can be reached directly at 541 598-5449 or firstname.lastname@example.org .