Current state of (Home Finance) affairs

MARKET UPDATE

The roller coaster ride that is today's real estate and mortgage market continues to loop, turn and spiral in unexpected (or expected, depending on which site of the debate you listen to) ways.

Is "Mortgage" becoming a bad word? IMHO (in my honest opinion, according to my kids), the answer is an affirmed "no."

Mortgages above 80%, however, are changing dramatically and we may very quickly find ourselves without 2nd mortgages as we know them.

For those that are a little newer to the home buying market: 2nd mortgages in their most recent iteration have allowed home buyers to pay a little higher interest rate on a separate mortgage above the traditional 1st mortgage that went up to 80% of the value of the home.

The good ol' days saw the remaining 20% (or even more if we stretch back a little further in time) as the required down payment in order to qualify for home financing. More recently, Private Mortgage Insurance often called MI or PMI (for one company's site, go here, or a general definition, go here) and the aforementioned 2nd mortgages have been available to provide the means to finance a greater percentage of the value of a home, up to- and sometimes over- 100% of its value.

Well times they are a-changing. The news has been replete with the shake-up of the subprime (trickier, unconventional loans or lower credit scores) market and the affect has 'trickled up' into the conventional market affecting how borrowers qualify for loans and the options they have with regard to financing more than 20% -- regardless of income or credit score. The latest change that's happening even as I type, is with regard to 2nd mortgages being, in many cases, pulled completely off the table.

The "why" for this is tricky to summarize because there are a number of things affecting this. The short answer is that the majority of lenders out there sell the loans they make on the secondary market, and the buyers willing to purchase those loans have stopped buying them.

Are 2nd mortgages completely gone? Let me set the stage, and then I'll answer that question:

The term "mortgage" (for the definition, go here) loosely means that it's a loan secured by a house -- there's a 'lien' on the property for a certain amount. The lender is extending financing terms in exchange for a secured interest. When the loan is paid off, the 'lien' is removed and full ownership interest is transferred to the homeowner. In the case of a 2nd mortgage, the lien is in 2nd position, behind the 1st mortgage.

So now we have a firm grasp (or possibly we're just holding on by our finger tips but at least we're holding on) on what a mortgage is and the difference between the 1st mortgage and a 2nd mortgage. The 2nd mortgage is more exposed in the event the homeowners stop paying the loan -- the reason it's even allowed is because of the historical average appreciation level of 6% per year. If the homeowners (who have turned the interest over to the lender so they could finance the home) stop making payments, the lender can auction the home off and even if there were two loans on the property, the home would have hopefully appreciated enough to recoup the amount financed by both lenders.

Enter Stage Right, a slowing market and rising foreclosure- or at least default- rate (go here for a June Seattle Times article about why to distinguish the two). That higher level of risk for the lender in 2nd position, and in this market with many loans over the past few years going to higher-risk scenarios has created a severe lack of interest in buying these 2nd mortgage loans. By higher risk I'm referring to lower credit scores and higher debt-to-income (DTI) ratio borrowers (borrowers who had more of their money going to their monthly payments than was traditionally accepted), with little or no money in the bank to fall back on. And don't even get me started on all of the ill-advised adjustable rate mortgages

The panic has now set-in, founded or not, and we're experiencing a mass exodus from the largest portion of the 2nd mortgage market: loans involving a loan-to-value or LTV (for a def. go here) of more than 80%, regardless of credit score, income level, etc. Bar-none.

How about some good news, yeah? The long and short of it (ok, maybe more the long) is that now is still a great time to buy. So what if loan programs are moving around -- this is a dynamic marketplace and lenders are reacting to the changes in the market in order to remain competitive.

There are still options that will allow you to finance more than 80% of the value of a home. PMI that I mentioned earlier will still do it, and there are still some 2nd mortgage companies that, for the time being, offer higher LTV financing. AND, interest rates are still historically low, sellers are motivated and at least in our market here in the greater Seattle area, current appreciation has cooled slightly giving buyers a chance to catch their breath.

Now that you've had a little rest and are prepared with a better understanding of current conditions courtesy of yours truly...

What are you waiting for?!?!? Give me a call so we can discuss your options and get you pre-approved and out there buying a house.

Operator is standing by. --James