Cherry blossoms and rain drops.
Part 3: Subprime Mortgages and Band-Aids
March 21, 2007 by 2 Comments
Most of the subprime mortgages I’ve originated have been for families who needed a "band aid" with their finances or credit. Borrowers in a subprime situation tend to have troubled credit or finances due to either
- Circumstance. Life events that have happened beyond their control. For example, illness, loss of employment, divorce, etc.
- Habit. Lack of financial discipline or responsibility. History of the same behavior such as bounced checks, collections, late payments, etc.
The subprime mortgage is not intended to be "long term" financing. It is temporary (often with a 2 or 3 year fixed payment period) and people with them need to be working on improving their financial situation so that when the prepayment penalty is over and their payment is about to adjust, i.e. that band aid is about to be ripped of their ouchie, the sting is not so bad.
During the 2-3 commitment period of the subprime mortgage (there is often a prepayment penalty associated with these types of mortgages), I have encouraged my clients to work on improving their credit scores and making changes in how they spend and save money.
Now is a great time to review your spending habits. If you’re reading this now, you probably have a personal computer that came all ready equipped with programs like Quicken or Microsoft Money. Begin by reviewing what you’re currently spending every day and decide where you can make better choices. Do you absolutely need to have a double tall latte everyday? Having a $3 coffee drink on your way to the office equals $780 per year! (I’m only counting weekdays and one drink a day–if you enjoy an afternoon coffee break, the cost is of course, higher). You should be able to notice spending that is not needed (need is different than want). Creating and following a budget will greatly help you plan for your financial future. Cutting back on luxury items, such as lattes or going out to lunch and dinner, will provide you with extra cash to pay down credit cards and other debts.
Related posts:
Don’t Refi Your Second Mortgage…Yet
March 20, 2007 by 4 Comments
This is the advice that I just gave one my clients who closed a loan with me in 2005 with (gasp) New Century Mortgage. She was going through a transition in her life and she is not a "subprime" borrower, but a divorce can create subprime situation. What was her nasty rate that I provided her via New Century? Here is her scenario:
- 100% LTV using two mortgages (80/20).
- 1st Mortgage is a 3 year fixed 5 year interest only with a rate in the mid 5% range with a three year prepayment penalty (not optional to waive).
- 2nd Mortgage is a 30/15 in the mid 9% range.
Yesterday I sent out an email to my entire database of clients to provide information about the subprime mortgage industry. Since her mortgage is with New Century, she was naturally concerned and called me. While talking to her, she told me that she is in the process of refinancing her second mortgage to a 10 year fixed rate mortgage. She just wants to lower the rate and pay it off–great intentions!
Here’s the possible problem. When you refinance two mortgages, if the second mortgage is not a "purchase money second mortgage" (the original mortgages from purchasing your home) it is then priced as a "cash out refinance" even if at that transaction, no cash is received by the borrower. This can really impact pricing on the first mortgage when it’s time to refinance.
"Loan to value " is just one of the factors in pricing a rate for a mortgage. With a cash out refinance, if your loan to value (new loan amount/value of home) is:
-
70-80% LTV may equal 0.50% to fee (or approx. 0.125 – 0.250% to rate)
-
80-90% LTV may equal 0.75% to fee (or approx. 0.325 – 0.625% to rate)
Here’s my advise for this client:
Her prepayment penalty will be over next summer and since she does want to stay in her home, I advised not refinance the second mortgage. The refinance proposal from the credit union does provide a better interest rate and would shorten the term of her second mortgage to a 10 year over a 30 year amortized with a 15 year balloon, and it would increase her mortgage payment over $100 per month. I suggested that she keep the current second mortgage and apply the $100 extra she’s willing to pay towards the principle of her existing second mortgage.
Then, next year when her prepayment penalty is over, refinance both mortgages at that time and receive the best rate possible (non-cash out) for her new mortgage. And reduces her closing costs to one mortgage next year instead of closing a refi for the second mortgage this year and again for refinancing the two mortgages next year.
Alas…something good to come out of contacting my clients about the current subprime scenario!
A Real Estate Agent’s Guide for Subprime Buyers
March 19, 2007 by 2 Comments
Unless you’ve just been rescued from a deserted island, you have heard the news about what’s going on in the subprime mortgage industry. It’s not a pretty site and in fact, it’s getting dicier every day with Alt-A lending (not quite subprime lending…it’s more of the stated income and 80/20 types of loans) tightening up, many people you helped find homes for during the past couple years no longer qualify for a mortgage.
For example, on the afternoon of Friday, March 9th, I received a quote for a client with a mid score of 750 who needed an 80/20 mortgage stated income. I was planning on brokering to Greenpoint Mortgage. That very evening, I received an email stating that Greenpoint Mortgage is no longer doing ANY 80/20 mortgages. Greenpoint Mortgage is NOT a subprime lender. They are more along the lines of "alt-a" (not quite "conforming"). I had to contact the gentleman I had sent an email to hours earlier to tell him that I no longer had a mortgage program for him.
There are worse stories surfacing as well. When New Century Mortgage, one of the nations largest subprime lenders and a poster-child for the subprime mess, could no longer do fundings, many potential home buyers were at the funding stage of their mortgage…with no funds and no mortgage. Yes, it’s possible if you have a subprime buyer, you may get all the way to closing only to have the lender not able to fund the mortgage.
What should you do?
1. Ask your potential home buyer if they have a subprime/alt-a mortgage. Some signs might include:
- 80/20 Financing (what does the preapproval letter say about loan-to-value?)
- Stated income
- Prepayment penalty (you can determine this on the Federal Truth In Lending, your buyer may not know)
2) Ask the Loan Originator if the lender they are working with is subprime or alternative. Even traditional "a paper" lenders, such as Countrywide and Wells Fargo, have subprime divisions.
So what if your buyer is subprime or using alternative (alt-a) type financing?
- You may want to consider closing quickly. Many programs are disappearing quickly (such as 80/20s and stated income). Credit score requirements are being raised and underwriting guidelines are toughening up for these types of loans. Some lenders may honor programs if the loans are locked…some may not have any choice.
- You might have the buyer provide a reduced earnest money. In the event of a worse case scenario, in case they lose the funds if their financing contingency is waived.
How about your clients who have closed using subprime 80/20 mortgages? This could be an excellent time to reach out to them. They may be hearing all of the bad press on the news and could be rightfully concerned.
If your subprime clients have not worked on improving their credit since they obtained their mortgage 2-3 years ago, they could be in for a world of hurt when their mortgage is getting ready to adjust. I strongly encourage you to have them contact their mortgage professional asap to have their credit reviewed to see if they should (1) refi now; (2) work on their credit and wait until their prepayment penalty is up; (3) do nothing…prepare to sale.
It’s My Birthday!
March 16, 2007 by 1 Comment
It really is my birthday today. And so… I am taking the day off… off of work and off far far away from the blogs.
I’m going to have my cake and eat it too!
And yes, that’s me! At the old (um…maybe I shouldn’t say "old") Lake Washington Park in beautiful Renton, Washington (my home town).
The building in the background is no longer there…once Boeing. Now I believe there are some nice condo’s in it’s place.
It looks like I’m trying to calculate an APR in my head! Future Mortgage Planner. I’m not sure how young I am in this photo… but I will count this as a "Happy Friday" post.
Cheers, Friends!
That New Car Will Cost You
March 15, 2007 by 3 Comments
If you’re considering buying a home anytime in the near future, please think twice before purchasing your next car. I’ve had a couple different scenarios lately where the car payment has really impacted the home buyers. Don’t get me wrong, I love cars. Old and new alike. Here’s how it impacts your home purchasing power (based on a 6% mortgage interest rate amortized for 30 years):
Part 2: Know Your Credit Score
March 14, 2007 by 4 Comments
EDITORS NOTE: What is considered a “good score” has changed quite a bit since the subprime era.
In Part 1 of the Subprime Series, you should have found your Note and contacted your Mortgage Planner. The next step is to review your credit report. I suggest having your Mortgage Planner pull a tri-merge report. They may or may not charge a fee for the cost of the report (around $20).
Whats your mid-score? Just last year, a score of 600 was an easy mortgage transaction (for subprime)…now the bar is raising due to all of the foreclosures. Typically, your “mid score” is going to be how you’re judged by the mortgage companies. With a tri-merge report, you should have 3 scores ranging from 350 – 850. Your mid score is literally the number between the highest and lowest score. 680 and above is considered to be a good credit score. 720 and higher is excellent.
Another Option for People with Subprime Mortgages
March 13, 2007 by Leave a Comment
Dan Green did an excellent post today on…what else? Subprime mortgages. He suggest that subprime borrowers look at refinancing now (if they plan to not sell their home) instead of waiting until the prepayment period is over. His thoughts, which are valid, are that there may not be products available in the future when the time is right for a person to refinance out of their subprime loan. To read Dan’s post, click here. [Read more…]
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