How To Get Home

A few weeks ago, I made a post on the subject of risk. A lot has changed in the last 3 weeks so I thought I would revisit the issue.

The headlines today were more of the same - Late Mortgages Jump to 3 1/2 Year High - New Foreclosures Hit All-Time High. Today’s release of the 4th quarter (2006) delinquency/foreclosure report had some less than ideal numbers. Of all the mortgage loans out there, 4.95% were delinquient: 2.57% of prime loans and 13.33% of subprime loans. These numbers are up and by all accounts, the 2007 first quarter numbers will be even worse.

Home Owner/Buyer: If you can not make your payments after a period of time, the bank could foreclose on you. You risk the possibility of losing your home, credit, and any equity in the home. I am not sure how many stated income, 620 credit score, 100% loan-to-value, 2 yr ARM with Interest-Only borrowers out there had a detailed conversation with their lender about the future possibility of having difficulty making their payments in a timely fashion. The reality is that some buyers have not given any consideration to the risk of taking on a certain loan and the lenders did not force the issue. The question of what is or is not a suitable mortgage depends on the borrower’s situation and needs to be discussed in detail.

The problem is getting worse because the housing market has slowed down. For borrowers with financial difficulty in the past, it has been much easier to sell or refinance the home. As more and more subprime and Alt-A mortgage loans start to reset, more and more of these borrowers are going to have difficulty making their payments and will find it difficult to sell or refinance in today’s market.

There is no easy way out of this and no amount of new regulation/legislation is going to make it go away.

If you are in the process of buying a home:

1. Make sure you understand the risk associated with both your situation and the loan program you are looking at. Your real estate agent, your lender, and your mom cannot guarantee you that you will be able to sell the home for any set amount of money in 2 or 3 years. It is the buyer’s responsibility to understand what could happen, worst case, if your adjustable rate mortgage loan resets while you are still in the home. It is your lender’s responsibility to provide you with this information.

2. If you are thinking about doing 100% financing, talk about the possibility of your home going down in value and what that would mean to you, if you had to sell in the near future.

3. Look at your personal financial situation and see what you can do to minimize your risk as a borrower: save money, improve credit, pay off debt, get better paying job/work more hours.

No one has been talking about the down-side risk until lately. Reality is setting in quickly for some who are faced with tough choices. If you are in a loan that is not sustainable, talk with your lender. Be pro-active and stay in constant communication with them. No one wins in a foreclosure situation. Ask your current lender what your options are. If you have an adjustable rate mortgage, you need to know when it will adjust and by how much.