Mortgage Crisis
By Martin Braddock
Article Word Count: 508 [View Summary] Comments (0)
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The goal of most Americans is to own a home. Congress wanted loans to be made to low income citizen by eliminating the down payments and providing 100% financing. The mortgage holder was able to buy a home for the same amount they were paying for rent.
A lot of these loans were ARM (adjustable rate mortgage) which usually had low payments in the beginning, then adjusted the interest rate (usually to increase) and payments could also increase at a later date. To prevent a payment becoming to large when the 30 year rates became affordable, the ARM should be changed in the first five years of the mortgage.
Your lender in most cases sold the loan to an outside mortgage company. Freddie Mac and Ginny Mae purchase around 50% of all mortgages.
This process will work if the property that is mortgaged continues to hold or increase its value. When the appraisal is done to switch to the 30 year fixed loan, the value will support the new loan. The loan payment will probably increase a little but will lock in the payment for the length of the loan.
If the borrower runs into trouble making the payment when the ARM adjusts interest rate, the ultimate action is foreclosure. The market value of the property may have declined and will not provide collateral for a new fixed loan. Property value tends to decline for a period of time and your situation gets worse. Meanwhile prospective buyers wait for the market to bottom out.
When the house is put into foreclosure, the house is sold and the proceeds are applied to the balance of the loan. If a balance remains, the borrower is liable for that amount. The lender then has to provide security, taxes payments, maintenance and utilities until the property is sold.
Since the market is declining and credit standards are tightening up the down payment will increase, the required credit score will increase, and loans will be hard to get for persons wanting to buy a home in this price range.
The lending institution will have additional expense and the possible decline in the value of the property until it is sold. These loses have to be charge of against profit when making earning reports.
The current financial crisis has been caused by losses of such an amount that the lender needs to raise capital by selling assets or borrowing from others.
The question is what are the mortgage properties worth to serve a collateral for a loan from others. Outside loans are not being made. A governmental guarantee or the sale of the lenders assets are the other possibilities.
Homeownership will be difficult to finance for the near future unless you have a 20 % down payment, credit score of 740 or more, and favorable appraisal. Current interest rates for these conditions would be in the 5.5% range.
Keep making deposits into savings to make your down payment and be properly positioned to buy a home.
More to come in the next Make Money Work newsletter.
To your financial success,
Martin Braddock
P.S If you have any friends or family that may be interested in making money work harder have them contact my website:
http://www.makemoneywork.info for more information. E-A118
Martin Braddock with 25 years of financial planning experience can give you expert advice and the best plans for your financial future in one shot. With the commission selling removed, you get honesty advice and the best financial care that you can possibly have.
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