Palmdale Mortgage

A large number of loans these days are ending up in foreclosure. Notice of defaults, deed in lieu of foreclosure, short sale, loan modifications, these are the terms of the day.

One cause of the rise in this type of activity was the end of the roller coaster ride in home appreciation. Property values in most areas stopped rising in 2006 and in many areas they have since fell sharply. The rise in delinquencies and defaults has been concentrated on loans in which people were refinancing every year or two and making large purchases using the equity. I am sure you saw it too. Everybody had new cars with navigation and televisions, people who used to just be getting by were living the lifestyles of the rich and famous. When the bubble busted all this came to a quick end.

SA lot of property was purchased by investors and speculators with no money down. The term 80/20 was the order of the day. Short for a 80% first loan and a 20% second. These borrowers were destines to fail. Property would have to appreciate 10% for them to cover the commissions and the closing costs alone.

Borrowers had their backs against the wall from day one. But for the past few years it had been working. You could buy a house wait 6 months and refinance it and buy a car for cash. You could wait another 12 months and take a cruise to Jamaica or a trip to Hawaii. Once the appreciation came to an end it was a harsh reality for those refi based big shots. Reality came back. All those fancy cars went back to the dealers. All that jewelry went to the pawn shops.

When the appreciation doesn’t happen even if the payments remain the same, the average borrower does not feel the same about making those mortgage payments. Some continue to pay and except the new circumstances. Many feel there is no reason for them to continue to pay for something that is not worth what they owe on it. Even though they enjoyed every dollar along the way.

The thought that this would last created a refinance boom. Loan officers were making money hand over foot. Lenders were making billions of dollars. The banks were just as bad as the borrowers look at them. The same ones that made all that money are now bankrupt begging for hand outs. In 2004 all you had to do was buy a house and wait for 6 months and you could cash in. In places like Florida and Nevada you could by pre construction with little to no money down, wait until finished and sale for $100,000 profit. Some of these borrowers were influenced by savvy loan officers who told them do an option loan and invest the money you will save on the payments and turn a profit.

Some home owners used the growing equity in their homes as a way to live beyond their means. They would build up credit card debt, then consolidate the debt into their mortgage through a cash-out refinance. The consolidation, by extending the term of the credit card debt, reducing the rate and making the interest tax-deductible, would reduce the borrower’s total monthly payment. They could then start building up their credit card debt all over again.

This process could continue only so long as their houses appreciated. As soon as appreciation stopped, they were stuck with debt that was not manageable, or with negative equity in their house, and in 2009 they are stuck with both..

The most common mortgage in the sub-prime market is the 2/28 ARM. This is an adjustable rate mortgage which the rate is fixed for 2 years, and is then reset to equal the value of a rate index at that time, plus a margin.

Sub-prime margins are high, the rate on most 2/28s will rise sharply at the 2-year mark. This means that while the loan is affordable to the borrower at the initial rate, it may not be affordable after two years when the rate is reset.

If the house has appreciated, this is not a problem because the borrower can refinance – if necessary, into another 2/28. While these loans carry refinance costs and typically have prepayment penalties, the costs and penalty can be included in the balance of the new loan if the borrower has sufficient equity.

The borrower who does not have the equity needed to refinance, however, is stuck with the higher payment on the existing 2/28 that may be unaffordable.

Many consumers made purchase and refinance decisions based on the notion that their houses would appreciate, as they had for many years. When appreciation stopped, both their incentive to make their payments and their ability to do so was history. It wasn’t only sub-prime borrowers who fell into this trap, but these borrowers had the least capacity to help themselves.

Why did lenders allow this to go on? Maybe because they made more profit than any other time in history.