|
We have all heard about the crisis in the sub prime mortgage business. Sub prime loans are loans that are approved for borrowers with less than stellar qualifications. During the past few years, when we were experiencing rapid property appreciation in most markets, lenders loosened their underwriting requirements for almost all borrowers, including those who fell into the “sub prime” category. Frequently there would be an outrageously low initial interest rate, thereby allowing the borrower to qualify for a larger loan, and this was often coupled with a low or no down purchase requirement.
The problem with all of these loans is that whenever the initial lower rate expires, the interest rate will increase, frequently to more than the borrower can afford. Lenders who had been counting on rapid appreciation to allow borrowers to refinance their high interest 100% loans to a lower interest rate 80% loan were suddenly finding that the value of the property was the same or may even have decreased instead of increasing, and borrowers were suddenly unable to make their payments or refinance into the more favorable loan situation. In many areas the result is a glut of properties on the market, thereby lowering prices even more.
Up until recently, this did not directly affect our local market environment very much, except in the lowest priced neighborhoods, as our chronic inventory shortage continued and ever anxious buyers were still willing to compete for whatever homes they were interested in and pay over asking price in most cases. However, all of that may be changing.
In response to the sub prime crisis that has affected so much of the country and parts of California, many lenders recently tightened their underwriting criteria for almost all borrowers. No longer will they qualify buyers at the lower introductory rate, but at the fully indexed rate. 100% stated income loans, where the lender relies on the income statement of the borrower without documentary confirmation (almost always reserved for the most qualified borrowers) have all but disappeared. FICO score requirements have been tightened. Interest only loans may no longer be qualified at the interest-only payment but are now qualified at the fully indexed and fully amortized amount (as if the borrower is paying principal as well as interest.) In other words, it suddenly has become more difficult for even highly qualified borrowers to obtain the mortgage they may be looking for, and they will qualify for less in many cases.
What does that mean for us, in this isolated island of real estate madness? Well, it may mean fewer buyers for any individual home on the market. People who may have qualified to buy a $2.5 million home may now only qualify for a $2 million home. Buyers who may have been preapproved earlier this year may be in for a big shock if they rely on that preapproval figure to purchase a home now. All buyers should review their qualifications with their particular lender to makes sure they haven’t been bumped into a slightly lower price range.
So far there has been no noticeable change in our market because of these changes, but the changes are very recent and not fully implemented. The jury is out, but sellers must know that the market landscape may shift somewhat over the summer months. Buyers must know that their purchasing power may be diminished. They may be able to mitigate this with a 40 year as opposed to a 30 year mortgage, but they need to check. Real estate agents must alert their clients to the most recent changes and be pro active in advising their clients as to their best strategy in this new environment. | 
RSS Blog Feed