DON'T PANIC...REMAIN CALM...
Here is a message I received from a lender that I really respect, Mark Afman:
Now then I don't know if Animal House was Kevin Bacon's very first movie, but it was close. I remember him as one of the new pledges in the snobby frat house on campus and was also one of the members of the ROTC group that marched in that ill-fated parade. But the scene that jumps to mind is him screaming DON'T PANIC...REMAIN CALM...as everyone and everything did just that. That is kinda how I feel right now when it comes to the "economic crisis" that we are being told we are in. Now don't get me wrong. I am not one of those guys that wears rose colored glasses all the time but I do believe that some of the actions by investors in the market place is an emotional over reaction to the issues at hand. Here is what happened as I see it. Now having said that, I admit that I am no financial wizard but most things can be broken into simple terms so that we can all try to understand the basics. Let me start by saying that overall only about 4% of all mortgages in the US have actually become non-performing loans where the home owner is behind on their payments or in a full blown foreclosure. It is estimated that there are are another 2-3% of borrowers that are still making their payments but are in loans that have a higher balance then the value of their homes and therefore could become a non-performing loan. So with more then 90% of all mortgages still doing well, why are we in this "crisis"? Well because contrary to the popular opinion, most mortgages do not make a very high profit margin. So when a few loans go bad, that profit margin is even worse.
If you had a mortgage in the 1960's or before, the money for that mortgage came from the savings deposits that were in a bank. That all changed when the someone came up with the idea of treating mortgages kind of like the stock market. Now your mortgage is piled into a great big block of loans, along with millions and millions of dollars worth of other mortgages, and sold on Wall Street to investors. So if you were an investor with $100,000,000 that you were looking to get a return on (these investors are companies or governments or investment groups), and you decided to invest that money in Mortgage Backed Securities or mortgage bonds, you would want to make sure that it was a pretty safe investment...right? Well the problem is that in each block of these loans there were a few bad loans mixed in with the good ones. Sub-prime loans, No Income Verification loans, loans with low teaser rates that jumped up later or actually added more on to your principal when you paid the minimum payment are all examples of these kind of bad loans. These bad loans were not sold by themselves but were sprinkled in to a block of good old 30 years fixed loans.
Because of the highly competitive market for good, 30 fixed type loans, the margins on the good loans were pretty low so when the few bad loans started to go bad, that whole block of loans that investors invested their millions in would not be worth much. When the word got around that these blocks of loans were not a good investment anymore, these investors went looking elsewhere to put their money. When that happened, the mortgage industry had to stop providing the risky loans which makes sense but then they also had to start tightening up on some of the good loans. So now it is tougher for some buyers to get a loan because of the perceived risk in those big blocks of loans..
It has taken a little bit of time and probably will take some more but now that investors are getting used to the idea that the big blocks of loans have much less of the bad loans in them, they are starting to invest more and more in the Mortgage Backed Securities market. So the bottom line is that there is still plenty of money to loan for a buyers home but they just have to be a better risk then a few years ago. We are getting back to the days when you actually had to save some money to have a down payment and you have to provide the lender with all of your income and asset documents to get an approval. A high credit score is not enough to get a loan anymore.
So again I feel like Kevin Bacon yelling "DON'T PANIC...REMAIN CALM... We will get through this and if someone is thinking of buying a home or refinancing their current home. It won't cost them anything to check all of it out (if a lender is trying to tell you that you have to pay money up front, find another lender) and then they will know if they can do it or if they need to wait.
I look forward to any questions you may have. Thanks, Mark Afman
Please feel free to visit my real estate and mortgage blog at www.markafman.com
Thank You,
Mark Afman
Senior Loan Consultant
Universal Lending
Delivering Your Long Term Mortgage Needs With Professionalism And Integrity
Direct 303-759-7392
Cell 303-905-2488
Fax 866-896-9240
Denver Board of Realtors 2006 Affiliate President
Denver Board of Realtors 2006 Affiliate Of The Year
South Metro Denver Realtor Association 2007 Affiliate Vice President
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Your friend in real estate,
Shelli Dore
www.ShelliDore.com