Non Conforming / Sub Prime mortgage lingo cleared up

These days you can't turn on the t.v. without hearing the words real estate bubble burst, sub prime loans coming to roost, non-conforming loans ... yada yada yada.

I thought I'd take a minute and at least inform about what the mortgage terms mean, and try to explain why the news insists on making the topic the front of your daily conversation.

A non conforming loan is one that does not conform to Federal National Mortgage Association (FNMA) guidelines because the amount is too high or because FNMA underwriting or other criteria are not met.

An example of these are jumbo mortgages, or loans that were given with second mortgages that allowed the borrower to buy a home with -0- down. They are also referred to as sub-prime. Those who have a financial situation that is complicated or unusual (small business owners with "unvarifiable or low stated income") and don't qualify for conventional lending may find that a non conforming mortgage loan is the preferred option.

Conventional lending is fairly safe for the bank and the consumer because the amounts are reasonable and can be paid back (on paper). However, non-conforming loans are much riskier for the lender not only because of the larger amounts of money lent, but because the borrower may share far less information. With less risk, there are better interest rates; therefore, with a non conforming mortgage loan, the interest rates may be much higher, as the lenders see the chance of foreclosure to be more likely. Borrowers have to be smart and decide what is more important: privacy or saving money on interest.

Hopefully that is clear as mud now, but why all the hype lately? After 9/11 mortgages were being issued and re-financing was being done at a record clip. It was not uncommon to see a mortgage and a home equity loan given to a family that was 10 - 20 % more than the appraised value of a home.

Naturally, the extra 20% loaned out on a mortgage did nothing to increase market values. Since the re-fi boom, we have seen literally 10's of thousands of jobs leave the Detroit area, K-mart, Ford, Chrysler, Delphi and a host of other corporate cutbacks and bankruptcies being the major contributors.

A great majority of those formerly employed families either left the state or filed bankruptcy resulting in either mortgage foreclosure and/or an overwhelming quantity of homes thrust into the market for sale with very few potential buyers to clean up the mess.

The resulting buyers market has forced a downturn in housing values over the past 3 years... those same homes that were financed for 20% over value are now worth in most cases at least 20% less than they were 3 years ago.

This is making the financial world rumble lately regarding sub prime loans coming due. Many balloon mortgages, interest only loans or other non conforming scenarios will either need to be refinanced this year or next or owners will be paying huge mortgage costs that they cannot afford in our already over taxed region.

Re-fi's may be difficult considering a home of lesser value than 3 years prior not being able to gain a favorable enough appraisal to warrant a new mortgage with better rates... a real catch 22.

Hopefully none of you are in that situation. If you are, feel free to call me anytime to have a confidential discussion about potential repairs. I've got plenty of contacts in the mortgage and finance arena that can give sound advice and assistance.

Dave
248-321-0151