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ARMS and the Mortgage
Lenders are shutting down, laying off thousands of employees and leaving borrowers in the dust. Interest rates and the terms of loan offers change daily. Borrowers with tarnished credit are facing deal-killing loan terms -- if they can find a loan at all.
While poor repayment of subprime loans to borrowers with tarnished credit is the primary concern, there are a few signs that more blue-chip borrowers are also having problems.
Lenders are now less willing to take a risk on borrowers because taking those risks during the recent housing boom has now put many lenders in financial distress. Lenders are quickly closing the door to borrowers with low credit scores, small down payments for a new home or little equity in their current homes.
Sam Molinaro, chief financial officer for investment bank Bear Stearns, which has suffered huge losses investing in risky mortgage loans, said that the upheaval in the mortgage market is on the same scale as the fallout from the tech-stock bubble in 2000 and the stock-market collapse in the 1980s.
Part of the reason is that in June, the Federal Reserve issued guidance for lenders offering adjustable-rate mortgages. Since then, most of the large lenders, including Countrywide and Wells Fargo, have eliminated ARMs with low "teaser" rates that were fixed for the first few years, then began to rise -- often above what the homeowner could afford.
Everyone agrees that more sensible lending standards should make certain that future borrowers can afford to keep their homes over the life of the loan. Indeed, a recent federal directive to freeze mortgage payments to help those afraid of losing their homes adjust their budgets is a major helpful move in the market.
So what do you do? If you are younger, with very little credit history to show a lender, it may be difficult to obtain a mortgage. Likewise, if you have some black marks on your credit history, you may want to try to work on improving your credit score.
Find out what lenders know about you by ordering copies of your credit report from the big three credit agencies: Experian, Equifax and TransUnion. You are entitled to one free report from each agency per year and can access them by visiting: www.annualcreditreport.com.
Keep in mind that each report may contain different information; creditors are not required to report to all three agencies. It is crucial to look at each individual report for errors. Your credit report not only provides basic information -- name, address, date of birth, Social Security number -- but also details your outstanding debt and available credit.
If you aim to improve your score, you first may need to dispute any errors in writing. Then, do the easiest thing to help yourself -- pay your bills on time! Your payment history makes up one-third of your credit score.
Next, you need to start paying down your credit-card debt. A key component to your credit score is called credit utilization, which is the ratio of your debt to available credit. Low credit utilization is a good thing because it means that while you have available credit, you don't need to use it.
Yet don't be tempted to open new accounts in an effort to tip the scales back in your favor. If you have a high amount of debt, new accounts are looked at negatively in two ways: first, they can indicate that you are in trouble and searching for more credit; and, second, they will lower the average age of the accounts on your credit report.
This is called credit seasoning; lenders like your credit to be "seasoned" to show your ability to repay debt.
Ultimately, higher interest rates correlate into higher monthly mortgage payments. So, the amount of home you could afford a few months ago will likely need to be re-evaluated.
Andrew Lasner is Realtor and a senior real estate specialist at Keller Williams Preferred in Newtown. He can be reached at 215-860-0800.