Subprime Mortgage Meltdown Leaves Borrowers Facing Crisis

Subprime Mortgage Meltdown Leaves Borrowers Facing Crisis

With credit requirements tightening, borrowers have fewer choices in mortgage loans

Sacramento, CA, July 7, 2008-As record numbers of foreclosures pervade the subprime market, lenders are becoming more and more anxious, and as a result, they're tightening their mortgage loan guidelines. These more stringent guidelines, many of which relate to credit scores, are making it difficult to impossible for individuals with less-than-perfect credit to secure the loans they need-whether to buy a new house or refinance a loan to keep their homes out of foreclosure.

"Borrowers are facing a very difficult time these days," explains Leon Williams, Certified Mortgage Planning Specialist and Asset Optimization Specialist, with NueStart Financial Services, a mortgage brokerage company based in Sacramento, CA. "For instance, last year a borrower could get into a 30 year fixed with a 500 score, and now they need a 580 to qualify. Lenders are much more cautious these days."

Traditionally, the subprime market has offered a less stringent standard of underwriting mortgage loans, providing borrowers with lower credit scores the opportunity for financing where traditional lenders may have turned them down. Now that the subprime segment is not only losing players, but also subjecting borrowers to more scrutiny, fewer opportunities exist for certain borrowers to secure financing. One of the primary difficulties that current borrowers of subprime products face is the inability to secure financing to replace adjustable rate mortgages that have adjusted to a higher interest rate, sending the monthly payment skyrocketing above the initial minimum payment amounts.

Despite the fact that the industry is seeing much more stringent policies among lenders of subprime and nontraditional loan products, guidelines for underwriting standard loans have remained largely unaffected. The Federal Reserve Board's Senior Loan Officer Opinion Survey on Bank Lending Practices released in May 2007, states that policy toward standard loans remains largely unchanged. Over half of the banks that responded to the survey reported tightening standards on subprime loans, nearly half did the same for nontraditional loans, but only 15 percent said they changed requirements for prime residential mortgages.

It remains to be seen how the prime market will be affected by the subprime crisis in the future. "The bottom line is that regardless of the market, there are always good people in need of mortgage financing," states Williams. "The key is to get them into mortgage loans that can help them thrive. For some, that takes credit repair or some form of analysis to help them improve their credit scores. A person's credit score can be improved upon with some help."

Credit repair is increasingly becoming a necessity for borrowers with subprime credit scores. "A whole segment of the lending industry is disappearing," explains Edward Jamison, president of Los Angeles-based Jamison Law Group, PC, a national credit repair and restoration company. "Because lenders are tightening their requirements for credit scores, borrowers with less-than-perfect scores are finding that they have fewer and fewer options. Credit repair can be their only recourse, or can be a means to getting into a better loan."

"Today's top mortgage professionals have the resources to assist their clients in a wide range of issues effecting their financial well being, whether that's recommending a financial planner or a credit repair specialist," states Steven Marshall, president of Strategic Equity, a Seattle, Washington-based company providing training to the mortgage industry. "This business is no longer about simply saying yes or no to a loan request. For today's top professionals, it's about being a knowledgeable and well-connected resource for the borrower to get the absolute best loan for their financial situation."

Despite the slowing real estate market and subprime crisis, prime refinance activity is still strong. According to Freddie Mac, refinances accounted for over 40 percent of the total number of loan applications for the first quarter of 2007. Of those refinance loans, 82 percent resulted in a new loan balance at least 5 percent greater than the unpaid balance of the original loan. In the first quarter of 2007, Americans completed an estimated $70.5 billion in cash out refinances nationwide, just slightly below the $77 billion that was cashed out in the fourth quarter of 2006.