Subprime Market Tightens Up......

Yesterday, I was on the phone with a friend who happens to be a lender, and we were talking about how our business has been, and so on. All of the sudden, he throws out the idea that he expects home price to drop 40 to 50 percent!!!! I was shocked that he threw out such a huge number, and I argued that from a realtor's perspective, we are seeing lots of multiple offers and homes selling at over asking price. In fact, activity during this year has seemed to pick up, despite the latest news about the subprime loans. Needless to say, I got off the phone with this friend, and decided to do some of my own research on the issue.

As a result, I placed a phone call to one of our mortgage brokers, Rochelle, at my Coldwell Banker office. Just so you know, we have two mortgage brokers at our office, and both are amazing, honest, experienced brokers who will give you the real story without sugarcoating. Here's what I learned:

Causes

• At times, subprime lenders were giving loans to individuals with less than optimal FICO scores and income levels. Many of these loans are adjustable, so that after a 5 (or 7, 10, etc) year fixed, low rate, the new rate adjusts to a higher rate. The result is higher monthly payments, which at times concided with an individual having a pay cut. The effect was that the person couldn't afford the loan, and would enter default.
  

• New Century is a huge subprime lender that has had trouble and gone bankrupt. A huge number of their clients were being foreclosed.
  

• Lenders are scared to make subprime loans because they fear that the loan may enter default, which is not a good position for the lender.

Issues

• People who had adjustable rate mortgages now want to refinance, but some of those people were given subprime loans. As a result of the tightening up, now they are not qualifying to refinance because they are still subprime and lenders don't want to take the risk.
  

• Harder to get pre-approvals for people with stated income documentation and lower FICO scores.

• Each day, lenders are taking away certain subprime programs and changing the guidelines. Lenders have stricter guidelines.

Bottom Line

• If you have previously been pre-approved, you need to do so again as guidelines have changed. Some lenders and mortgage brokers are adding clauses that say the particular pre-approval is effective as of the day the letter was created.

• Higher income areas seem more shielded at the moment. Not many, or very few, foreclosures are occurring in higher cost areas.

• If you are qualified to buy and can show full documentation, lenders are still giving great terms on loans.
  

My Opinion

If you are qualified to buy a home, then this subprime market mumbo jumbo shouldn't affect you too much. Basically, it seems lenders are restricting standards to a level that they should have been at all along. The main population impacted are those who purchased a bigger home than they could afford and were able to do so by taking advantage of lenient loan programs. The main story is that the latest restriction is creating a forced responsibility amongst home buyers to ensure they are only buying what they can afford.

How does this affect the housing market?

Hard to say. Currently, the Westside seems to be doing just fine. Many properties are selling in multiple offers at over asking price. As long as people are qualified to buy, then they can go ahead and buy the home that they want.