Sub-Prime Mortgages: Crisis Averted?

I’ve posted here before that there were signs that the sub-prime mortgage mess, while unfortunate for many, was not the crisis that the press makes it out to be. The housing market is just too important to this economy, and while no one is screaming “bailout”, there have been consistent signs that the country is not going to sit idly by and let millions of people lose their homes.

Today President Bush announced that new programs were being established to help 80,000 people who have fallen behind on their payments. I’d be willing to bet that if conditions worsen, even more programs will be announced. Sure, they’ll blame it on the predatory lenders rather than home buyers that made bad decisions, but at the end of the day, no one wants people out on the street. It’s in everyone’s best interests–from the owners’, to the lenders’, to the government’s, to keep people in their homes.

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FAQ: ARM Loans

A very informative article about shopping for ARM loans (more popular given the recent jump in both jumbo and second trust rates).

The bottom line is to show around for rates, and know which questions to ask.

– Determine the initial interest rate and how long you will get it
– Ask if it’s a negative amortization loan
– Determine what the rate increase will be and how often it ‘resets’
– Determine what the annual and lifetime ‘caps’ are and how quickly you might reach them – this gives you the worst case scenario on your rates. Make sure you understand what the payment is at those rates.
– Know what the index (LIBOR, T-bill, etc) and spread is
– Know whether your loan is a balloon, and what term the balloon is, or based on a 30 year amortization

The author wisely points out to be wary of internet lenders. I’ve seen cases of this myself—even if the rate does turn out to be as low as they claim, keep a careful eye on the fees they charge but are buried somewhere in the Good Faith Estimate (GFE), and often not in the “Lender Fee” section where you’d expect.

Speaking of fees, that’s the only I’d add to this list—always ask what the fees are, and what they’re for. Always ask about things like: administrative fee, underwriting fee, processing fee, application fee, document fee, and warehousing fee. Don’t get me wrong—a lender needs to make money too, but these are the fees you should be comparing, and negotiating. And also understand the origination fee and any discount fees, especially as it relates to the interest rate you’re being charged. Two lenders might both be quoting 7%, but one of them is charging you a “point” (equal to one percent of the loan value and listed as a “discount point” on the GFE) to get it!

As always, you can contact me with any questions, or to look over your GFE with you. I can’t negotiate it for you, but I can tell you which things I’ve seen before and which things I haven’t. I routinely do this with my clients.

And of course, the way to avoid many issues is to work with a reputable lender in the first place!

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