The sub-prime mortgage market meltdown continues to make headlines on the internet and in the media, and the fallout continues to shake-up the mortgage world. I myself, have never been a big-fan of sub-prime mortgages. In general, I think that sub-prime mortgages are a decent tool to be used for a specific borrower under specific circumstances. And to make a long argument short, in comparison, a lot of people who (unfortunately) have been placed into a sub-prime mortgage would have been much better off (and better advised) to have rented for 12 to 24 months, taken the time to get their finances and credit in-order and then moved forward in purchasing a home (at a reasonable rate and program). For more on sub-prime mortgages, read last week’s post.
The melt-down of the sub-prime mortgage business has had, and will continue to have, an effect on the mortgage and housing markets as a whole. And when things start to melt-down (like the ice-caps for instance . . . or are they?), people start to get all kinds of (read: crazy) ideas and theories.
Note: This photo has the earth facing right-side up, thankfully
Here are a few theories that you can count on . . .
1. 100% mortgage financing guidelines will tighten across the board — although the recent problems have been mainly from low credit score, high-risk borrowers, investors who back mortgages are not as excited about 100% financing options to borrowers. Over the past few years, guidelines for 100% financing have become increasingly inclusive and the difference between a rate with 5% down and 0% down has become smaller and smaller. As a result of the problems in the sub-prime market (and the fear that similar problems will eventually come to bear in A minus, Alt-A and A-paper loans, first mortgages with 100% loan-to-value (LTV), and/or 2nd mortgages with 100% combined loan-to-value (CLTV) will steadily become harder (more exclusive) for marginal to average borrowers to obtain.
2. The Feds will not lower the Federal Funding rate due to problems in the sub-prime mortgage business. The Feds number one job is to control inflation, and one of their favorite measures of inflation is the Personal Consumption Expenditure which came out today showing that inflation increased by 0.3% in February. This increase (the largest since August) came in above expectations of 0.2%. Year-over-year core rate rose to 2.4% — well above the Feds target PCE of 2.0%. Don’t expect a Fed rate cut until this numbers sits below the 0.2% Fed-target for consectutive months.
3. The US Government (along with the un-helpfulness of the media) will try to figure out why all this happened, why the debacle, who is to blame, etc. And in the process, the general public will be reminded of how working with a mortgage professional is much different than working with a guy (or gal) who simply “does” mortgages, and will hopefully be reminded that the best interest rate is not always the same as the best mortgage.
Along that same thought I am reminded of the great words of the late President Ronald Reagan, “The nine most terrifying words in the English language are, ‘I’m from the government and I’m here to help.” [end quote]
Hi Mr. and Mrs. 580 credit score, my name is a 2/28 ARM, I’m from the sub-prime mortgage world, I have a 7.25% margin, a 12 month LIBOR index, and a 2 year pre-payment penalty . . . and I’m here to help (well, not really).