Guide to the Subprime Lending Fiasco and other Mortgage Market Facts

Sub prime mortgages are the reason more than 110 lenders have filed for bankruptcy protection and have also seriously damaged operations at many major mortgage firms. At least 5 hedge funds have been wiped out cost more than 30 thousand lost jobs, and has led to millions of foreclosures with more on the way. And, as if that weren't enough, sub prime mortgages are also blamed for massive volatility in the stock, bond, credit, futures, and real estate markets here in the US and around the globe. Some say losses in the mortgage securities market alone could reach hundreds of billions of dollars this year.

The mortgage market is so entirely different than the one that existed just 12 months ago. Most Americans looking to buy, sell or refinance their homes are finding rough going because of this change.

How did this happen?

Record appreciation in home values fueled by historically low interest rates forced banks to compete for the ever growing business this caused. By loosening lending criteria and offering more aggressive loan products lenders began to fund more borrowers than every before. Ideal lending conditions such as high demand for real estate and ever increasing volume and profit on mortgage backed securities allowed banks to continue this loose pocket for several years.

As real estate sales began to slow and home values began to decline, higher inventories of real estate began to emerge leading us to today's credit crisis leaving many homeowners unable to sell or refinance their existing homes. Homeowners who had used their home equity for other things found themselves overextended to the point of failure. Foreclosures have followed in record numbers and caused equity markets to reevaluate their positions on banking and mortgage instruments.

We have yet to see the bottom of this market yet. More than 2 million Adjustable Rate Mortgages will face more than 30% payment increases in the next 12 months. While these loans make up less than 40% of the total market the negative effects will be felt all over the market. Increased foreclosures and increasingly tight credit policies are sure to follow this down turn.

What does this mean to you and your mortgage?

Sellers: If selling your home is in your near future be prepared for a much longer time on the market for you home. The current credit restrictions being put into place have cut the number of qualified buyers by as much as 25%. Make sure when pricing your home that you price it at the correct price. Now is not the time for emotional hang ups about the sentimental value of real estate. Using a qualified Realtor will help in this manner. Don't be fooled by someone saying they can sell your house for more than the current market value. A good Realtor will also help make sure the people looking to buy your home are qualified to buy it and are not wasting your time.

Buyers: If you buying a home is in your near future, it is important to get approved for your mortgage first. Know what you can buy before you get out there and get your dreams smashed. If looking to refinance remember in volatile markets interest rates and terms can change more than once a day. Get professional help and once all your questions are answered make a decision and get on with it. You do not have the luxury of delay or of shopping many different lenders. So in this respect get referrals from your friends and neighbors about the lenders they used and would recommend.

Borrowers with less-than-perfect credit: Use your mortgage professional who may have resources to help you repair your credit and can also help you reach your financial goals. It can be challenging but it can be done.

As a buyer, seller or someone looking to refinance in the current market you must remember that all markets are cyclical. They go up and down. It just so happens that for the last 7 years it has been an up market. We are seeing a correction now and while it may get worse before it gets better learn to use the cycles and you will be alright.