The Mortgage Mess

It is bad and going to get worse. That’s it in a nutshell. Currently most jumbo mortgage lenders (loans over $417,000) have pulled out of the market, and those lenders who are still making jumbo loans are adding over a point to the interest rate. They have also tightened up the underwriting criteria to the point that they will know the borrowers’ complete financial picture. Stated income loans, although still available in certain circumstances, do require higher credit scores and substantial borrowers’ equity position either through larger downpayments or lower loan to value in the case of a refinance.
The cause for the meltdown started in the sub-prime mortgages as the initial teaser rates began to reset at higher (unaffordable) rates for many borrowers. As with the stock market bubble a few years ago, and the real estate debacle in the early 80’s, people were convinced that real estate prices only went one way and that way was up. When the sub-prime adjustable rates went to reset homeowners tried to refinance into a better mortgage. In many cases these borrowers hadn’t cured the problems that made them a sub-prime borrower to begin with, or their property value hadn’t increased the 25% that they had hoped for. In any case they couldn’t make the payments now and they began to default on their payments.
This would have caused a minor slowdown if that were where the problem stopped, but it wasn’t- and still isn’t. Many homeowners also bought their homes using negative amortizing loans, the so-called “pick a payment” loans. This is the type of loan that I have railed against for 4 years, or more. These loans have just now begun to re-cast because they have reached the maximum negative amortization that is allowed in the mortgage note. These borrowers are now finding that even if they put 10 or 20 percent down, the loan has gone negative enough to eliminate their equity position. Now those homeowners are beginning to default and those homes are being foreclosed on.
Hopefully people who are smarter than me (that really doesn’t take much) will see a way out of this fiasco.

Conforming mortgage rates (under $417,000) for fixed rates as of 8/21/07 (a.m.) are:
(Rates quoted are for 0 point loans and a 30 day lock in rate)

30 year fixed: 6.5% (APR 6.57%) payments are $2,635.72/mo.
15 year fixed: 6.125% (APR 6.246) payments are $3,547.11/mo.