Mortgage Rate Resets for Alt-A Borrowers

Over 1 trillion in Alternate A loans are due to get their rates reset over the next 3 years. Alt-A Loans are a notch above subprime loans and this batch of loans are the ones that many people got in 2004-2006 and were adjustable rate mortgages.

Many people are already thinking that this reset of mortgages could cause as much damage as the submprime crisis we just went through in 2008 and early 2009. Fannie Mae owns upwards of 30% of those loans and has publicly acknowledged their is a large risk of default on this subset of borrowers.

When these loans originated, this Alt-A group of mortgages were considered to be relatively stable and not that high risk. Only over the last 6-9 months have people started to realize that the reset of these rates could spell further trouble for the already sagging financial markets.

One option that may help is for banks and lenders to start resetting these rates at levels that borrowers can afford. If the institutions wait until it’s too late we will end up seeing another huge freeze in the credit markets which will lead to a further decline in equities. Companies should wise up and realize that getting 5% on a loan is much better than getting nothing if the borrower goes into default and has to foreclose on the mortgage. The lost time of payment, while it takes about 6 months to complete the foreclosure process is a huge drag on earnings for the banks.

Let’s hope that lenders everywhere see this coming storm on the horizon and act prudently to reset rates to levels that borrowers can afford so we can start to rebuild the faith in our financial markets.

When to Lock in Mortgage Rates

With mortgage rates making huge swings over the past 15 years, it can be tough to decide if you should lock in mortgage rates or wait and hopefully get a better deal later on. Over the last 5 years mortgage rates have been historically very low and over the last 2 years they have been at almost record low levels. With the financial crisis that started in late 2008 and still is ongoing into 2009, you can find mortgage rates at close to 5% for an owner occupied home - though most of the time that requires 20% to get that rate.

Your own financial condition will dictate whether or not you should wait to lock in a particular mortgage rate. If you are planning to buy a home and only stay in it for 2 or 3 years then worrying about an extra 1/4 percentage point on your mortgage is not really worth it because the money on the loan is inconsequential. Now if you know you are going to be in your home for 30 years, then getting that extra 1/8th of a point deduction on your interest rate is a huge deal.

Mortgage rates are close to their record lows. It’s really not worth waiting an extra few months for a lower rate, because you’re never really giong to beat 5% or 5.25% interest rate on an owner occupied home. If you wait you may see rates jump to 6% and then you’re paying a lot more over the life of your loan. Most of the time it makes sense to act right away, because if you wait to get better rates you’ll just be second guessing yourself if they go up.

When you find a house or townhome that you like you have the option of locking in current rates, letting them float for a couple weeks or you can take out an adjustable rate mortgage, (ARM) instead of a traditional fixed rate mortgage. With the downturn in the housing market it is getting hard to find ARMS, because banks and mortgage brokers have been much more reluctant to lend that money, because many people that are interested in ARMS are subprime borrowers.

Whether

Low Mortgage Rates

US homes are now at their most affordable prices since 1970 when the national association of realtors first began tracking home sales data. Low mortgage rates are a huge win for everybody. If you own an existing house, you can refinance and lower your monthly payment and if you are looking to buy a new house, your payment will be much less at a 5% interest rate than it would be at 6%.

This dramatic reduction in interest rates has helped spark a mild upswing in housing purchases. Right now the economy is struggling mightily  and it will not get right until the housing market finds a bottom. For the first time in over 7 months, housing sales increased. This doesn’t necessarily signal a bottom in the market, but it does show that we are getting closer to the inevitable slowest point.

There is a huge stimulus package in the works that when combined with low interest rates, should help spur an increase in housing sales across the country. Some regions will get healthier quicker and some like Florida may take a couple years before they get right. Miami has an inventory of unsold homes right now at 30 months, which means that if no houses were added to the market, then it would take almost 3 years for Miami to sell all the existing inventory.

One of the biggest issues is that even people with good credit are having a hard time getting access to the capital they need to buy a home. If you have bad credit, it is a very tough time to get a mortgage right now, the subprime market has dried up massively in the last 6 months. Low interest rates and a federal stimulus will help this market get turned around, but it will take time before things get close to what may be considered normal.