Post by unlawflcombatnt on Aug 17, 2007 13:57:56 GMT -6
Below are excerpts from an interesting article by Noelle Knox and Christine Dugas from USA Today, titled
Mortgage pinch causes domino effect of pain
The article describes several specific mechanisms by which the Housing Bubble is deflating.
People trying to "buy up" in the market are having trouble because credit is drying up for the less affluent buyers who would potentially buy their current home. (Largely the result of the decline in subprime lending.). Many of those trying to "buy up" have already signed contracts and put down a deposit. Unable to sell their current residence, they're having to back out of the newer home they were planning on buying. Below are some excerpts from the article giving examples of this:
"Matt and Kimberly Brown's contract to buy a new home in Yelm, Wash., will expire at the end of the week. They've lined up a no-money-down loan through the Department of Veterans Affairs, but the Browns haven't been able to sell the town house they live in, so they will have to back out and lose their $1,000 deposit.
"A lot of people looked at (the town house) and love it," says Matt, 26, who works in auto insurance claims. "But they either can't get the interest rate they want for a home loan, they can't get accepted for a home loan, or they can't afford it."
The problems in the mortgage industry, which began late last year and have rapidly deteriorated since June, are having a domino effect in the real estate market. Increasingly, first-time home buyers are getting shut out of the market, and that hurts move-up buyers like the Browns, who are asking $182,000 for their town house. Homeowners are also having more trouble refinancing their escalating adjustable-rate loans, and that is increasing the number of foreclosures and the supply of homes on the market. As a result, sellers are having to wait longer and cut their prices more deeply....
Just two months ago, Barbara and Jeff Barker were happy they had finally rented Barbara's former home in Sparks, Nev., which they had been trying to sell since November 2005. The new tenant has an option to buy the home in June for $375,000. That's $100,000 less than the Barkers' original asking price, but they agreed to take it.
Now, the tenant, a single parent, is "telling us she is not sure she can qualify for financing and wants to extend the lease another year," says Barbara, 44, a middle-school teacher.
"We might be in the predicament again" of trying to sell their house, she says.
Nationwide, more sellers and agents are complaining that homes will take even longer to sell now than last year because more contracts are falling apart over the financing.
Larry Underhill, an agent in Stockton, Calif., says he's seeing homes go under contract two or three times. Each time, he says, the deal craters, because "Buyers can't qualify, or buyers are understandably cautious. They see property values sliding and are saying, 'Why am I doing this?' "...."
Not only is it getting more difficult for subprime borrowers to get any type of loan, it's getting more difficult from prime as well. This is especially true for borrowers in high-priced areas who need "jumbo" loans to purchase homes. The excerpt below gives an example of this:
"]"We had a buyer, a doctor with an 800 (point) credit score, a down payment of more than 20%, and the (lender) backed out at the last minute," says Lisa Gregory, an agent at Prudential California Realty in San Diego, who represents the seller. "We were stunned."
Since the end of June, the average interest rate for these jumbo loans has jumped to 7.43% from 6.96%, while the interest rate for conventional loans has declined slightly to 6.68%.
That gap in interest rates means a borrower with a $417,000 loan will have a payment that is $217 a month more than a borrower with a $416,000 loan. In areas where homes are already unaffordable for many working families, that can be a budget breaker....
Greg McBride, a senior financial analyst at Bankrate.com...says, "If this situation persists for months on end, it will have an effect on higher-end home prices. Many buyers will effectively go on strike, and those that remain won't have the same buying power."
The qualification hurdles are so bad in California, where the median single-family home costs about $595,000, that a record number of sellers are offering to lend money to their buyers in the form of second mortgages. From April to June, almost 5% of home sales in the state had seller mortgages on them. Three years ago, less than 1% of sales had seller "carry back" financing, according to DataQuick Information Systems...."
In addition to this, ARM buyers are having more trouble refinancing their homes, as the original assessment of the home's value has declined. In order to refinance their now depreciated home, they must pay off the difference between the current assessed value and the originally assessed value. This requires paying cash up front, before the new (refinancing) loan can be made. Some are able to do this, but many are not. The excerpts give examples of 2 affected homebuyers:
"When Christine and Michael Canavan moved from Fort Lauderdale to Melbourne, Fla., two years ago, they bought a $250,000 home with a subprime-borrowers ARM that allowed them to pay only the interest on the loan each month, which meant they wouldn't build up any equity unless their home appreciated in value.
After two years of making their payments on time, their credit score had improved to prime level, but the value of their home sank suddenly this summer.
"I had to go to (the mortgage broker) three times because our appraisal kept depreciating," said Christine, 38, an elder-placement counselor.
"At first he said, 'Great news, your home appraisal would be $275,000.' Within a week, the home had gone down to $240,000. When I went in to do the paperwork, I was in tears. It had dropped to $230,000 in two weeks."....
To refinance with a 30-year, fixed-rate mortgage, the Canavans had to scrape together $19,000 to pay off their old loan.
"I feel so sad for families that don't have money to bring to the table to refinance these loans," she said.
Those families include Loretta and Jimmy Mendez. They bought a $219,000 home in nearby Palm Bay with an interest-only three-year ARM that resets next year.
"We invested $20,000 in this home," says Loretta, 31, a dance teacher. "Not only did we lose that money, we owe more than what the house is worth. We're supposed to refinance soon, and I don't know what we're going to do."
There are a lot of homeowners and home buyers who, like the Mendezes and the Browns in Yelm, Wash., are unsure of the future, hoping the mortgage market calms down soon...."
The article goes on to state that there were 2 million homeowners behind on payments at the beginning of 2007, according to the Mortgage Bankers Association. According to the association, 560,000 of these are already in foreclosure proceedings.
And the problem will only get worse. Delinquencies and foreclosures are expected to rise, especially over the next 6 months, due to the resetting of adjustable-rate mortgages (ARMS).
The full article can be found at
Mortgage pinch causes domino effect of pain
Mortgage pinch causes domino effect of pain
The article describes several specific mechanisms by which the Housing Bubble is deflating.
People trying to "buy up" in the market are having trouble because credit is drying up for the less affluent buyers who would potentially buy their current home. (Largely the result of the decline in subprime lending.). Many of those trying to "buy up" have already signed contracts and put down a deposit. Unable to sell their current residence, they're having to back out of the newer home they were planning on buying. Below are some excerpts from the article giving examples of this:
"Matt and Kimberly Brown's contract to buy a new home in Yelm, Wash., will expire at the end of the week. They've lined up a no-money-down loan through the Department of Veterans Affairs, but the Browns haven't been able to sell the town house they live in, so they will have to back out and lose their $1,000 deposit.
"A lot of people looked at (the town house) and love it," says Matt, 26, who works in auto insurance claims. "But they either can't get the interest rate they want for a home loan, they can't get accepted for a home loan, or they can't afford it."
The problems in the mortgage industry, which began late last year and have rapidly deteriorated since June, are having a domino effect in the real estate market. Increasingly, first-time home buyers are getting shut out of the market, and that hurts move-up buyers like the Browns, who are asking $182,000 for their town house. Homeowners are also having more trouble refinancing their escalating adjustable-rate loans, and that is increasing the number of foreclosures and the supply of homes on the market. As a result, sellers are having to wait longer and cut their prices more deeply....
Just two months ago, Barbara and Jeff Barker were happy they had finally rented Barbara's former home in Sparks, Nev., which they had been trying to sell since November 2005. The new tenant has an option to buy the home in June for $375,000. That's $100,000 less than the Barkers' original asking price, but they agreed to take it.
Now, the tenant, a single parent, is "telling us she is not sure she can qualify for financing and wants to extend the lease another year," says Barbara, 44, a middle-school teacher.
"We might be in the predicament again" of trying to sell their house, she says.
Nationwide, more sellers and agents are complaining that homes will take even longer to sell now than last year because more contracts are falling apart over the financing.
Larry Underhill, an agent in Stockton, Calif., says he's seeing homes go under contract two or three times. Each time, he says, the deal craters, because "Buyers can't qualify, or buyers are understandably cautious. They see property values sliding and are saying, 'Why am I doing this?' "...."
Not only is it getting more difficult for subprime borrowers to get any type of loan, it's getting more difficult from prime as well. This is especially true for borrowers in high-priced areas who need "jumbo" loans to purchase homes. The excerpt below gives an example of this:
"]"We had a buyer, a doctor with an 800 (point) credit score, a down payment of more than 20%, and the (lender) backed out at the last minute," says Lisa Gregory, an agent at Prudential California Realty in San Diego, who represents the seller. "We were stunned."
Since the end of June, the average interest rate for these jumbo loans has jumped to 7.43% from 6.96%, while the interest rate for conventional loans has declined slightly to 6.68%.
That gap in interest rates means a borrower with a $417,000 loan will have a payment that is $217 a month more than a borrower with a $416,000 loan. In areas where homes are already unaffordable for many working families, that can be a budget breaker....
Greg McBride, a senior financial analyst at Bankrate.com...says, "If this situation persists for months on end, it will have an effect on higher-end home prices. Many buyers will effectively go on strike, and those that remain won't have the same buying power."
The qualification hurdles are so bad in California, where the median single-family home costs about $595,000, that a record number of sellers are offering to lend money to their buyers in the form of second mortgages. From April to June, almost 5% of home sales in the state had seller mortgages on them. Three years ago, less than 1% of sales had seller "carry back" financing, according to DataQuick Information Systems...."
In addition to this, ARM buyers are having more trouble refinancing their homes, as the original assessment of the home's value has declined. In order to refinance their now depreciated home, they must pay off the difference between the current assessed value and the originally assessed value. This requires paying cash up front, before the new (refinancing) loan can be made. Some are able to do this, but many are not. The excerpts give examples of 2 affected homebuyers:
"When Christine and Michael Canavan moved from Fort Lauderdale to Melbourne, Fla., two years ago, they bought a $250,000 home with a subprime-borrowers ARM that allowed them to pay only the interest on the loan each month, which meant they wouldn't build up any equity unless their home appreciated in value.
After two years of making their payments on time, their credit score had improved to prime level, but the value of their home sank suddenly this summer.
"I had to go to (the mortgage broker) three times because our appraisal kept depreciating," said Christine, 38, an elder-placement counselor.
"At first he said, 'Great news, your home appraisal would be $275,000.' Within a week, the home had gone down to $240,000. When I went in to do the paperwork, I was in tears. It had dropped to $230,000 in two weeks."....
To refinance with a 30-year, fixed-rate mortgage, the Canavans had to scrape together $19,000 to pay off their old loan.
"I feel so sad for families that don't have money to bring to the table to refinance these loans," she said.
Those families include Loretta and Jimmy Mendez. They bought a $219,000 home in nearby Palm Bay with an interest-only three-year ARM that resets next year.
"We invested $20,000 in this home," says Loretta, 31, a dance teacher. "Not only did we lose that money, we owe more than what the house is worth. We're supposed to refinance soon, and I don't know what we're going to do."
There are a lot of homeowners and home buyers who, like the Mendezes and the Browns in Yelm, Wash., are unsure of the future, hoping the mortgage market calms down soon...."
The article goes on to state that there were 2 million homeowners behind on payments at the beginning of 2007, according to the Mortgage Bankers Association. According to the association, 560,000 of these are already in foreclosure proceedings.
And the problem will only get worse. Delinquencies and foreclosures are expected to rise, especially over the next 6 months, due to the resetting of adjustable-rate mortgages (ARMS).
The full article can be found at
Mortgage pinch causes domino effect of pain