A couple of days ago I was talking to an old friend. My friend, with a concerned tome to his voice, asked me how I was going to be able to support myself in the wake of “this whole sub-prime thing?”
I’ve begun to realize that there is a perception among the public that the collapse of the Sub-Prime Mortgage Industry means the collapse of the Real Estate Market. The reality is this just isn’t true.
Let me begin by explaining how mortgages work. Generally when a lender writes a mortgage they do it knowing that they will re-sell this loan in the secondary market. Generally what that means is either Fannie May (for conventional loans) or Freddie Mac (For government loans (i.e. FHA or VA)) buys the loan from the original lender.
In order for Fannie Mae or Freddie Mac to buy these loans, the loans must conform to specific standards. As long as the loans conform to these standards, then the lender that originated the loan can sell it in the secondary market.
Over the past couple of years the Stock Market has been uncertain. Investors were looking for something that had a good rate of return coupled with relative safety. Many investors started looking at Mortgage Backed Securities. The problem was that the rate of return on conforming loans wasn’t very sexy.
Here’s where the Sub-Prime Market comes from: Lenders began to offer loans to buyer with less than perfect credit (Sub-Prime). These loans were made with higher interest rates to compensate for the higher risk that the lenders were taking on the loan. The Lenders, unable to sell these loans to Fannie Mae or Freddie Mac turned to private investors. These new securities were bought up as fast as lenders could produce them. Investors finally had a place to put their money that had a great rate of return (up to and over 10% in some cases) and it was safe. After all, nobody was going to allow their home to be foreclosed on!!
Well, we can see now what’s happened, can’t we? Interest rates are going up, and now more and more homes are going into foreclosure. Investors who bought these Sub-Prime Mortgages have begun to loose money, so they aren’t interested in buying any more. Lenders that based their business on writing Sub-Prime Mortgages can’t re-sell these loans anymore, which mean they can’t write any new Sub-Prime Loans. And that is how we got to where we are today.
Now, what does that mean to us in the Real Estate industry, or more importantly to buyers and sellers of Real Estate? Simply it means this: We now have to do a better job qualifying our buyers than we did in the past. The days of buying a house with a credit score in the 500’s with no money down are over. Today’s buyers are going to have to have decent credit and 10 – 15% down for a conventional mortgage.
There are still some programs out there for buyers with good credit but not much money for a down payment. FHA only requires a 3% down payment; VA doesn’t require any down payment and for buyers looking for property in rural areas can use the USDA. USDA has a great program that can get buyers into homes that otherwise couldn’t afford one at all.
The bottom line is this: For many, many years you had to save up your money before you could buy a house. A house wasn’t an impulse purchase. We are back to those days again. Fortunately for us, here on the Texas Gulf Coast, we still have very affordable waterfront property. So while the rest of the country reels from declining home values and “That Sub-Prime thing”, our market is still almost as strong as ever!!
Visit our website at: www.callteamklemm.com Paul Klemm, GRI Team Klemm
Coldwell Banker
The Ron Brown Company
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Ingleside, TX 78362
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August 25, 2007 at 1:10 am
“Second mortgages” for homebuyers were a big thing for buyers who put less than 20% down. You’d put, say, 5% down, then you’d have a conventional mortgage covering 80% of the principal and a second mortgage at a higher rate covering the remaining 15%. You’d avoid PMI that way, and the second mortgage is tax deductible.
Was the second mortgage thing related to the sub-prime market at all, or is it just a more creative-but-stable way of getting buyers into the market? And are those days over?