The Real Estate Crisis: A Consumer's Guide To Survival

There is no doubt that what we are experiencing today in the real estate and mortgage-lending industries is unprecedented. Those of us at Tippecanoe Mortgage feel it is important for the consumer to know that The Sky is NOT Falling and that there are ways to sell your home, buy a home, and obtain great financing in today's ever shifting housing market.

The purpose of this report is to give you a brief overview of what is taking place within the mortgage and housing industry and offer you insights which can help you understand the current conditions so that you have the tools available to know what to do if you are involved in a real estate transaction in the foreseeable future.

A Consumers Guide To Survival

When you read the financial pages these days, things sound pretty grim. Banks shutting their doors, investors losing millions on mortgage loans, depreciating homes languishing on the market, and mortgage professionals losing their jobs by the thousands...

The mortgage and housing meltdown of 2007 could be compared to a category 5 hurricane come ashore. The financial costs of the past few weeks alone are over $2 trillion and we believe the worst is yet to come. What is taking place in the United States is beginning to affect other countries besides our own. Within the global economy, not only are other countries dealing with their own sub-prime difficulties, financial companies in these countries have invested in our mortgage and real estate industries as well.

There wasn't any one event that occurred that has brought us to this place. Rather, there were several key ingredients that combined, created the perfect storm. First of all there is sub-prime and Alt-A lending. Sub-prime lending is for folks who would like to obtain a mortgage but for one reason or another haven't done a good job of paying their bills. There is a tendency to lump these people together as those who "don't deserve" a loan or home ownership and therefore never should have been considered for mortgages.

Our experience has taught us that many people in sub-prime loans were not in this situation because of their own irresponsibility, but were there due to job loss, being underinsured medically, divorce or loss of income due to the death or military service of a breadwinner. It only takes one mistaken posting on a credit report, identity theft, or one or two late payments on a bill to disrupt credit scores and put a borrower out of range of a "good" loan (Who among us hasn't tucked a bill into their purse or glove box meaning to mail it and let it ride around with them for a week or ten days?). Any one or a combination of these events could put a person into a situation in which a sub-prime loan was the only option available.

Alt-A lending is similar to sub-prime lending except that the borrower predominantly has good credit. With Alt-A loans the borrower is normally unwilling or unable to provide documentation for income and assets. These types of loans are normally referred to as stated or reduced documentation loans. In all, these types of loans accounted for 40%-70% of all loans done in the United States in the past few years. These loans are common for investors and self-employed people as tax wise it is to that borrower's advantage not to show their full income on tax returns.

Meanwhile a real estate boom was occurring. Perhaps you know of someone who purchased a home in Florida and then resold it in a few months for a huge profit. Investors began clamoring for ever-higher returns in the mortgage and real estate markets of some of our most populous states, Florida, California and Georgia. As we all know, what goes up must come down. I recall seeing many articles on the financial pages in 2005 and 2006 questioning not if, but when the real estate bubble would burst.

In Lafayette, our real estate economic boom ended before the rest of the country and we have been paying the price in devalued real estate for several years.

Let's take a peek into the world of mortgages...

Few mortgages are held by the bank or investor that funds them. Selling mortgages to make money for more mortgages has been a common practice in banking since the early 1990's. Many times the buyers for these mortgages are Wall Street security companies. With a housing boom going on, these companies developed an ever-increasing appetite for higher yield products, i.e. mortgages that they would make even larger amounts of money back on their initial investment. Mortgage securities are sold on the open market like any other stock or bond. The assumption was that people would continue paying their mortgages obligations on a monthly basis netting profit for the investors. Many of these loans were adjustable sub-prime loans. When the loans exceeded their fixed period (normally 2-3 years) the payments increased alarmingly. The borrowers could no longer afford to make the mortgage payments and in many cases the homes had devalued rather than appreciated so refinancing was no longer and option. All of a sudden investors began losing money.

A company that wants to sell their loans, packages them up in bundles that may be worth $100 million and sells them on the open market for $100-$101 million per bundle. As investors realized that many of these loans were not performing they began paying less for the package of loans and well...You can see what happened from there-cash was drained out of mortgage companies. No cash, no loans, the company goes out of business.

That's all well and good, you say, but...

WHAT DOES IT ALL MEAN TO ME?

What this means is that how you go about buying or selling a home is different than it was a year ago. Let's break it down into two pieces, buying and selling.

BUYERS

These are the facts:

1. It is a great time to buy. There is an over supply of homes in the market and sellers are willing to make concessions in order to sell their homes.
2. The variety of mortgage loans available VS one year ago is much smaller. While the credit profile of the sub-prime buyer still exists we are finding that with some guidance on our part and work on the part of the buyer we have been able to find good 30 year fixed rate products that will allow this buyer to purchase a home. Lenders have tightened up on guidelines that allowed a seller to hold second mortgages and the 80/20 combination to purchase a home is all but gone for anyone but those who have the highest credit scores. Guidelines for 100% financing have become much more stringent.
3. Investors will need to know that they will need a minimum of 10% to put down and will most likely pay a premium in points to obtain the lowest interest rates.
4. Lenders are tightening their guidelines on a daily basis. What applies yesterday does not necessarily hold true today and if your loan is in process when the change happens, many investors have no problem with declining the loan mid process. At Tippecanoe Mortgage we believe it is highly advantageous to choose a lender with a variety of products and investors. If one loan changes or doesn't work, another probably will and your transaction will most likely be completed.
5. Can borrowers who have had credit difficulties in the past still obtain loans? For those who have had situations occur that are beyond their control the answer is a resounding "YES". There are loan products available with good terms and market rates that are flexible that still can be obtained. Once again, I cannot stress enough the importance of choosing the right lender.
6. The dreaded Private Mortgage Insurance of the past few years all of a sudden has new life as it allows low or no down payment loans to continue as well as being tax deductible on purchases and refinances beginning in 2007.

SELLERS

The first thing sellers must understand is that we are now in a BUYER'S MARKET. It is very disappointing to learn that your home, which you had hoped to be a great investment, has lost value. That is the situation for some. So the question is, what to do?

1. The dreaded Private Mortgage Insurance of the past few years all of a sudden has new life as it allows low or no down payment loans to continue as well as being tax deductible on purchases and refinances beginning in 2007.
2. If you don't have to sell, now might be the time to batten down the hatches and weather the storm. This will pass.
3. If you are in a position such as job relocation for which you have to move, price your home aggressively. Your real estate professional will give you a price range in which he or she thinks your home will sell. Price it at the bottom of the range.
4. Offer seller concessions such as closing costs, or value added items like new appliances to make your home more attractive than the home down the street.
5. Now is the time to update the carpet, paint etc. Keep in mind there is a good chance you will be competing with new construction. Tour newly constructed homes in the same price range as your home-know your competition.
6. Work with a mortgage professional to offer special financing programs that will attract the widest range of buyers.
7. If you are in a situation that you have to sell, but you will end up bringing money to closing, view it as a loss like any other investment if you can. Pay the difference and move on. If you can't pay the difference call your lender and investigate what is known as a ‘short sale'. The bank really doesn't want your house back and might be willing to work with you.
8. Choose an aggressive and creative real estate professional to market your home.

HERE IS MORE GOOD NEWS:

The outlook for the job market in the Lafayette area is outstanding. Subaru, Caterpillar, Fairfield Manufacturing and Purdue and Discovery Park are all planning on growing and are hiring. Two hospitals are under construction, which will add construction jobs and health care positions in the near future. There has been a slow down in new construction and the approval of new sub divisions, which should assist in reducing current housing inventory. Interest rates are still quite good and it is still possible to finance a home without a large amount of money to put down. If you need to refinance out of a sub-prime or a variable loan there are good loan products available for you to do this.

In 2007 Tippecanoe Mortgage has closed more loans and qualified more homebuyers to purchase homes than at any time in our history. We make a difference for 500 families per year. Let us make a difference for yours.

Your Local Mortgage Services:

David Mennen
Mortgage Loan Consultant/Owner
Tippecanoe Mortgage, Inc.
Direct: 765-448-1808
dmennen@tippecanoemortgage.com
http://www.davidmennen.com/

Local Mortgage services for Greater Lafayette, West Lafayette Indiana, Purdue, Tippecanoe County, and the surrounding areas. Local Service with internet rates! Free Quotes! Visit my website for more Free Reports like this one. http://www.davidmennen.com/