Back To Basics

Expect a change to the basics in 2007 for mortgages and say goodbye to exotic mortgages.Home prices shot up to historical levels the past five years, introducing creative mortgage products and an increase in debt ratios. Remember the days when our mortgage payment (including taxes and insurance) couldn’t exceed 28 percent of our gross pay?

These past five years have sparked a huge housing bubble (oh did I say the dreaded word, housing bubble?!). At one time traditional 30 year fixed-rate mortgages was the popular loan product but recently there have been many alternatives introduced. No one saw the harm in offering interest only, Option ARMS and many other types of mortgages because home prices kept climbing (fueled by low interest rates). Homes were flying off the MLS within a couple days as buyers fought and literally threw money at sellers trying to get onto the housing bandwagon or get into the market before being shut out.

Well, the party is finally over and homes are staying on the market much longer than before. Home values are decreasing or have become stagnant (depending on which part of the country you are in) and a growing number of borrowers are failing to make their mortgage payments as introductory rates are beginning to reset to higher rates. Some people will be surprised to find a double to triple minimum mortgage payment due in the next coming months.

Many borrowers took these loans because they were unable to afford the home otherwise. Many of these borrowers have begun to miss payments. The number of foreclosures are reaching high levels and have caused many lenders to shut down. Now lenders are tightening up who they loan money to as EPDs (early payment defaults) climb and rate resets cause more defaults. Analysts are expecting over 1 million reset-related foreclosures in the next few years.

Non-traditional mortgages will probably continue to be offered, but with much higher regulation and higher standards. With many more loans planning to reset this year, we may hit a trend back to the traditional days where stated income with no proof are a thing of the past and where lenders are more careful about who they sign up.

If you are planning on getting a mortgage, think about how long you will be living in the home. If you choose an adjustable rate mortgage or an attractive loan with a teaser rate, plan for the higher mortgage payment. If you can afford the higher payment, then the loan may be a good choice for you. If you are currently in a home and know your rate is going to reset, try to avoid the higher payments by refinancing the home with different loan terms such as a fixed rate.