...What’s It All About?
Currently Congress is setting up hearings on what went wrong and why these types of risky loans have become such a dangerous stimulant to the homeownership ranks.
Subprime loans have gone from five percent of all mortgage lending a decade ago to about twenty percent of all mortgage lending today.
The reasons for this collapse seem evident. Many shady lenders promoted homeownership with low-level teaser rates to snag in borderline applicants.
Many troubled mortgages feature adjustable interest rates like the ones we get from Credit Card companies. These mortgages start artificially low and increase upwards after a soon to expire period. Many borrowers are asked, or required, to make little if any down payment. With the booming housing market over the last few years rates were steady and appreciation was soaring. Borrowers made their payments and lenders were happy to relax the normal protective standards.
Today’s Environment
But today’s subprime borrowers are facing higher interest rates at the same time as a cooling housing market puts downward pressure on the value of their equity. Many are finding themselves unable to make the payments.
Lender Standards Tightening
All homeowners involved in the finance market will face more scrutiny. Even if you have near perfect credit, your documentation(income etc) will be looked at more cautiously as even Congress is trying to prevent trouble in other aspects of the industry.
If you are in the market for a refinance because your current mortgage will adjust to a higher interest rate or because you'd like to borrow extra cash against your built-up equity, you can expect lenders to be more demanding about your credit, your ability to document your income and the appraised value of your home. Many lenders will be less likely to approve mortgages if the monthly payments consume more than 28 percent of the borrowers monthly gross income. Also, combined with payments on other loans, these payments should not make up 36 percent or more of income.
If You Are Expecting Trouble
If you are falling behind on payments or expect outside events to impact your ability in the near future, reach out for help now. Many lenders will be willing to work with you to help avoid foreclosures. Generally no one makes out on foreclosures but the person who gets a great deal after the house is lost. The key is to get the process moving before you fall behind on payments. Some lenders will OK interest-rate reductions without requiring the homeowner to refinance.
Many families that had to take on Subprime financing probably would not have become owners if not for the growth in less than perfect lending and aggressive lenders. From here on, look for Congress to create new pressure on lenders to only lend to those who can repay. Many reports are now surfacing about predatory lending where lenders make the loans knowing full well that timely repayment is a near impossibility.
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