Effect of sub-prime loans on our community
Published 4:00 pm Sunday, November 30, 2008
Headlines from an article in the New York Times dated September 30, 1999 read “Fannie Mae Eases Credit to Aid Mortgage Lending.” On this date in history mortgage loan underwriting criteria changed dramatically. The intent was to help borrowers with less than perfect credit, primarily extending credit to low and moderate income people to help obtain the American Dream of Homeownership.
The more relaxed underwriting guidelines started as a pilot program involving 24 banks in 15 markets and by the spring of 2000 were rolled out to the entire nation.
These new relaxed standards assisted homeowners in purchasing homes with little or no cash investment, and spurred an unprecedented rise in homeownership that swept across the nation.
Although FNMA (Federal National Mortgage Association) and FHLMC (Federal Home Loan Mortgage Corporation) developed these new programs with more relaxed underwriting guidelines, they unto themselves did not create the “Sub Prime Mortgage Crisis”
The real Sub-Prime designer loans were exotic hybrids that were offered through other mortgage outlets, specifically mortgage bankers and creative Wall Street investment bankers.
The most exotic and also the most dangerous loans to homeowners were called 2/28s.These loans were set up as interest only loans with a lower rate and payment for the first two years and then the rates and payments recast semi-annually thereafter for the remaining 28 years; with some loans increasing as high as three percent the third year.
Example:
For a loan of $200,000 starting at 6.5% the first two years, the payment would be $1,083.34. At the beginning of the third year/25th month the rate would increase to 9.5% with a payment of $1,583.34 representing an increase of over 50%.
Most unwary borrowers were told “Don’t worry, you can refinance out of this loan into a lower rate at the end of 24 months”.
In theory this may have worked if home prices had continued to increase but they have not. These exotic 2/28 products represent most of the loans that are now in or facing foreclosure.
Unfortunately there were other good 100% loans that owner-occupant buyers could have qualified for they were just never given the option.
The “why” is that these originating lenders made more money on these exotic loans then the standard FNMA, FHLMC or Rural Development Guaranteed Loans.
One did not need a CRYSTAL BALL or a PHD in Economics to know that these were unsafe loans.
Fortunately for our community most of our local lender’s (banks, credit unions and mortgage brokers) adhered to what is called “Responsible Lending Practices” which is the direct opposite of “Predatory Lending Practices.” For that we can all be grateful
It is interesting that in July of 2007 there were 11 licensed mortgage brokers in Clatsop County. As of today, there are only three licensed mortgage brokers remaining in our county. Thank God, we are one of the three.
External influences on our current market
It is also interesting to note that many of properties currently in foreclosure are not owned by Clatsop County residents. These are homes that were purchased by out-of-state owners utilizing 100% financing with exotic loan features like the 2/28.
Some of the buyers sincerely intended to move into these homes and retire here, but now have been unable to complete their plans based upon a downturn in the real estate markets where they currently live. Others purchased purely for speculation to purchase and then resell in a short period of time. Many of these homes purchased by investors for a quick buck are selling for prices less than they paid for them.
While our local lenders acted “responsibly” in their lending practices, many national lenders through direct phone calls, letters and postcards did sneak into our community and convince unsuspecting homeowners and buyers to take the exotic loans. Many times these lenders out-and-out lied, telling the homeowner it was the only loan they could qualify for.
Lately I have met with about a dozen homeowners who were hoodwinked into these loans and do not have sufficient equity to refinance out of them. The good news is that most reputable lenders are modifying loans into a more manageable rate and payment to allow these homeowners to remain in their home.
There is a not-for-profit group known as “Hope Now” that has good information to assist homeowners in re-negotiating with their lender to modify their loans to reduce their rate and payments. The official website for Hope Now is www.hopenow.com.
The good news
I believe very strongly along with my local peers in mortgage financing that we are very lucky to have avoided a lot of these sub prime loans in our community, and that with help from several non-profit agencies, can help these people recover from these loans.
Yes, we have seen changes in our market over the last several years, and in my opinion I believe these changes to be positive. Our prices have come back to reality and interest rates are still at or near all time lows.
Nobody can be certain of how long this trend will last, but based on my 41 years of lending experience and knowledge of our local trends, now is the time to buy.
Home prices are now in the affordable range for most families and legitimate 100% fixed rate loans offered through the Federal VA and Rural Development are still available.
It is a great time for potential home buyers to meet with their local Real Estate Professionals (Realtors) to see some of the great bargains there are to be had, and your local lender to explore financing options.
The American Dream is still viable in our community thanks to responsible lending practices and responsible realtors.
Alyce Burgess is a principle in the Astoria firm Essential Mortgage Loan Services. For more information call (503) 325-6346.
