Sub Prime Lenders
Sub Prime Lenders
By Armstrong Williams
May 10, 2007
The impact of the debacle with sub prime lenders is far reaching.
Mortgage companies continue to go out of business while those companies that remain solvent are shifting - sometimes dramatically – about how they do business. Yet, the capitulation in the sub prime market was quite rapid - some of the largest players were ousted from the game in a matter of weeks. However, strains on the market were evident from some time before. This was evidenced by the growing number of foreclosures month after month. Now, it is estimated that nearly 1million homes will be foreclosed upon this year alone. This continued upheaval in the real estate industry is leaving many homeowners and prospective homeowners wondering, "what's next?" and "how will I be affected?" The bottom line for those of us dedicated to building wealth is finding out how this will affect our, well, bottom-line.
For those of us with strong credit ratings as evidenced by the benchmark FICO score, we will see changes in how we finance our real estate albeit these changes will not be as significant as those with troubled credit. Our credit is the key to long-term financial success. We will continue to have access to the best home loans, at the best rates, with the best terms. It always makes sense to protect your credit because it will help protect your finances as well as your financial future. Unfortunately, not everyone has the credit rating they need to be insulated from the fall out. The real estate frenzy that characterized just a few years ago caused many people to take on more and more debt – particularly by tapping into the equity in their homes. Carrying the extra debt load can impact credit. More importantly, it fed a consumerism like none before. Now people are turning to credit cards to continue to fuel the spending habits that their “home ATM machine” made them accustomed to.
However, it is not too late to recover from the early years of the new millennium. Now is the time to look at your personal financial situation to figure out where you fall on the credit continuum and now is the time to talk to professionals who can help you improve your score. For example, a free credit report is now required annually by Federal law and is available at www.AnnualCreditReport.com. Homeowners with financial
challenges can contact The Home Ownership Preservation Foundation (1-888-995-HOPE), a HUD-certified, nonprofit organization that offers
advice and resources. The cost of not examining your finances can be expensive. It has cost one million people their homes. And the fallout extends to others who were employed in the mortgage banking industry. Several thousand people lost their jobs by working with sub prime lenders such as New Century. The numbers keep growing as the fallout spreads across a larger swath of the market.
New Century had been the second largest issuer of sub prime mortgages and was heralded as one of the great success stories – in any industry – over the last decade or so. Sub prime is really another name for some of the riskiest home mortgages offered to borrowers unable to qualify under
traditional, more stringent criteria. These loans often carry interest rates 2 to 3 percentage points higher than regular mortgages and
sometimes have low initial "teaser" rates that adjust higher in later years. Some lenders also lowered their credit and underwriting standards over the last few years as the real estate market heated up. It became too easy for some people to qualify for a mortgage. Many of these people probably should not have been able to borrow money for a home – especially at very unfavorable terms – until they had taken care of their own finances and credit first. Many people simply cannot afford to pay their home loan and are forced into foreclosure.
The lesson learned is, of course, do your research and ask questions, no matter how "good" a deal looks. There is no such thing as a free lunch and if it is too good to be true, it probably is. There is power in asking the right questions. There are many resources available to learn what questions
to ask. A good resource to start with is the Federal Deposit Insurance Corporation (FDIC). The F-D-I-C is the company that supervises and insures banks. If you have internet access, go to www.fdic.gov -> Consumer Protection -> Consumer Resources -> Looking for the Best Mortgage to get more information. Also, find a reputable mortgage banker from a company that you know and trust. Realtors or settlement attorneys often are a good source to go to since they know which loan officers does quality work and who treat their clients well. – They either know a realtor or know someone who does. Perhaps the best question to ask is when seeking a loan is "What is the dollar amount I will be required to pay each month throughout the term of the loan?" and not just "What do payments start at?" Sometimes the obvious questions are the best. First and foremost, make sure you really understand your personal financial situation. Do you have the income, credit, and reserves (money in the bank) to cover your mortgage payment as well as all of your other financial obligations?
The bottom line is even individuals who start with low credit scores and no savings may become home owners and minimize their risks of losing the
home in the long run. To reduce the cost of a home loan, you can improve you credit score by paying bills on time, keeping credit
card balances low, refraining from getting credit cards you don't need, and managing the ones you have responsibly. Keeping your payments low
and making them on time are the two most important things you can do to improve your credit score. Transferring outstanding balances between
cards can negatively affect your score. At some point, you will have to pay for what you bought. Lastly, if you haven't already, make it a habit
to review your budget. What you keep is more important than what you make. Living within your means now is essential to building your wealth. I cannot emphasize enough that you make your money when you purchase a property – not when you sell it. More to follow on this subject.
