Sub-What?

One persons meager attempt to simplify what it all means…


1. What is exactly is the sub-prime market?The sub-prime market consists of companies that provide loans to home buyers who either don’t have the best credit histories or, because of their income, are considered riskier candidates for loans.   It includes loan programs such as “no-doc” or “low-doc” loans that are based off of credit score alone, as well as Adjustable Rate Mortgages (ARM’s) and Interest Only loans.  You can think of an adjustable rate mortgage much like the credit card offers you see in the mail for a 1.9% Balance Transfer rate for 12 months, where the rate remains low for a pre-determined amount of time and then readjusts.  An Interest Only loan is one in which you make only the interest payments for a specified period of time. These types of loans can be utilized on the purchase of a new home or in refinancing an existing home. The important thing to remember as this national debate continues is that the sub-prime market encompasses many different types of loan programs, and not just those with lower credit scores.

2. What does it mean for the housing market?First and foremost, the most important thing to remember is NOT TO PANIC!!!  The sun will still come up tomorrow, the world will still turn, and everything will be okay.  Every market goes through cycles, and the housing market is no different. According to the Mortgage Banker’s Association National Delinquency Survey, 13.3 percent of sub-prime mortgage loans, and 4.95 percent of loans overall, were delinquent in the last quarter of 2006. You can expect to see inventories rise as more and more foreclosures go on the market, equating to more competition. If you are thinking of selling your home over the next year or two, you can expect the need to be more competitive on price and the likelihood for your house to be on the market longer than average.  This does not mean your house will not sell. Buyers are still buying, houses are still selling, and interest rates are still low.  For anyone who has ever contemplated purchasing an investment property, the next couple years will be choice for doing so.  Just remember, when the market shifts, so do the opportunities.  They don’t go away, they just change places.

3. Who’s to blame?Well, as with most things, it depends on how you look at it.  But one thing is for sure, everyone is pointing fingers.  On one hand, common sense tells us that if historically someone has had a hard time managing their financial responsibilities in the past, that it is likely to continue into the future.  It is hard to believe, or make a case for the fact that lenders did not know that at least some portion of this was inevitable. During 2006, and continuing into 2007 & 2008, many of these loans are due to adjust, causing monthly payments to spike drastically. Many people will not be able to afford these new payments, and are unable to refinance because they are maxed to the hilt as it is, thus causing them to default on their mortgage. Think along the lines of the Countrywide commercial, where there’s a nice looking gentleman who has a nice four-bedroom house, three kids, a riding lawn mower, an expensive barbecue grill and a smile plastered on his face.  “And how do I do it?” he rhetorically asks. “I’m up to my eyeballs in debt.”On the other hand, it’s hard to believe that this type of lending is really as “predatory” as the media would have you believe.  In most cases, the time frame for the low-payment period was fully disclosed, as well as the amount it could go up or down and how often.

4. What if I or someone I know is at risk of getting     foreclosed on?First and foremost, DO NOT avoid the situation.  If the bank calls you, TALK to them!!! Better yet, call them. They really, really, really do not want your house back.  In many cases they will allow you to work out some sort of a payment plan, or even defer your payment for an agreed upon time.  If you think your ARM is getting ready to adjust and that you will not be able to afford your payment and you cannot refinance to a FIXED rate, hire a realtor and put your house on the market—and be honest about your situation. A realtor at this point would be your best option and can help you in getting the bank to possibly accept a short sale—a win-win allowing you to sell the property for less than what you actually owe, keeping the home off the bank’s books, and keeping a foreclosure off of your record.  There are many, many alternatives, but absolutely none of them will work if you don’t talk to someone who can actually help you do something about it.

5. What are the key issues I should be concerned   about as a whole?Living beyond our means…Well, for starter’s, one thing is for certain—we, as a society, simply must stop living beyond our financial obligations. If you can’t afford it, do not purchase it.  If you do, don’t be upset when it gets taken away.  We have got to stop living beyond our financial means & then expecting our house to pay for it.Punishing the good with the bad…The truth of the matter is this–many of these loan programs have been around for years, and have been utilized successfully by many investors and borrowers who have put the money to good use (i.e. investing the money elsewhere where they can get a higher return).  As it stands now, many of the good borrowers will be punished for the negligent actions of others.Home ownership is a privilege…Perhaps the most important point to bring up is this: Owning a home is a privilege, just as freedom is a privilege.  It can only thrive successfully if those who participate in it understand that it involves both sacrifice and responsibility.  The more rules and regulations we have to make to “protect” the public, in all reality means the less freedom we truly have.  The truth of the matter comes down to this—we are all responsible for our own actions.  If there is only complaining and pointing of fingers when things go wrong, the housing debt situation will never be solved. It is once we start owning up to our actions, taking responsibility for them, and being proactive in confronting them, that we can truly start to solve them.