Understanding What is Going on With Mortgages

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So as a Realtor I hear a lot of talk about what is going on in the Mortgage industry and I have realized that about 90% of people have no idea what is really happening.  In this post I am going to try and describe what these so called experts are telling us.

The first thing everyone needs to realize is that there are multiple problems. 

The first problem is negative amortization loans,  people pay less then the monthly interest they owe.  There principal amount goes up each month.  Example -  You have an option arm loan for a 100,000 dollar home at 6%.  Each month you pay a payment of 4% and the extra 2% tacts on to your 100,000 dollar loan.  When home prices are going up like they were in 2005 this isnt a problem because the amount your home appricates is faster then the 2% negative amortization and you stay right side up in your home.  The problem is when home values decline or even stay flat you lose all the equity in your home.  That 2% per month means you soon owe more on you home then you could sell it for.  You are now upside down in you home. 

Second Problem -  ARM's   it stands for Adjustable rate mortgage.  Basically your rate is tied to a wall street index.  If the index rate goes up your home payment goes up.  Well this is really scary for people on a fixed income.  These loans of most often interest only so you are never really paying your home off.  When the rates go up you pay more interest.  These ARM's often have teaser rates for the first 2 years that then dramatically increase after that time.  

Third Problem - Flippers  when our market was booming many people purchased homes with the intention of just flipping them for a profit.   They are now worth less then they paid for them and many banks are forclosing on those homes as well. 

Fourth Problem - Piggy Back Loans -  Traditionally when you barrowed money for a home if you had less then 20% to put down you had to pay private mortgage insurance.  Today many people get 2 or 3 loans on one house.  They will get an 80% loan so they dont have to pay PMI then 1 or even 2 more "piggy back loans to cover the last 20%.  This helps them avoid pmi but it is much more risky. 

Fifth Problem - SubPrime Lending -  Over the last few years anyone who wanted a home could go to basically any subprime lendor and get a no doc/ stated income loan and walk out of the office with a new home.   Well many of these loans turn out to be fraudulent loans.  For basically 2 or 3 years we have almost no governmental oversite of sub prime lending.   Those lendors are now dropping like flies as they run out of money due to high forclosure rates and less money coming from outside sources. 

So you add these 5 major problems to a host of minor problems and you get our depressed forclosure market.  What does it mean for Southern Utah?  It means unless our growth continues to keep prices stable we could continue to see declining prices.   

The good news is this is a temporary problem and if you have good credit, arent upside down on your house, and you are responcible with your housing choices you will be fine.

Date: Saturday, August, 11th 2007 @ 05:24:17 PM
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