August 20, 2007 by Mimi Miller.

Over the past several years, many loans were made to homeowners with somewhat non-traditional or “non-conforming” situations, be it a poor credit history, inability to document income, or any number of factors that do not fit within the traditional “box” for home loans. These loans are often called “Sub-Prime”, or “Alt-A”, meaning that they were somewhat riskier in nature than A credit, prime, or traditional loans. Another type of “non-conforming” home loan is one where the credit and income might be perfectly fine, but the loan amount is higher than $417K, which is the current maximum loan that can be done using pools of money from mortgage giants Fannie Mae (FNMA) and Freddie Mac (FHLMC). If the loan amount is higher, it can certainly be done - it’s called a “jumbo loan” - but the end money comes from private institutions, not from the large government sponsored entities of Fannie and Freddie.

Most non-conforming loan product rates popped significantly higher in the last week. Here’s the scoop.

The end investor for Subprime or Alt-A loans will charge a premium for taking on a pool of these loans, because they know that traditionally, they might have a higher rate of default and delinquent payments within that risky pool. But lately, default and foreclosure has been on the rise - partly due to the fact that with credit tightening and a soft real estate market, many troubled homeowners are unable to refinance or sell in order to get out of trouble. So now, these end institutions are demanding a much higher “risk premium” for taking on these pools of loans, as they see the rates of default are climbing higher.

But since these institutions are purchasing these pools of loans sometimes months after the borrower has actually closed at a given rate, this increase to the risk premium means that instead of paying $101K for a $100K loan that will bear interest, they may only be willing to pay $95K for that $100K mortgage to account for the risk. Multiply that times thousands upon thousands of loans…and you have millions upon millions of dollars in loss for the company trying to sell the pool at a much lower price than they were expecting. This is called a “liquidity crisis”, and is exactly what happened to American Home Mortgage - there was no mismanagement, but they simply got caught holding too many “hot potato” loans, forced to sell them at massive losses…and eventually they had to make the decision to close the doors and stop the bleeding.

Further, even when a lender is able to take some losses, they may be subject to a “margin call”. This means that as their losses and risk premiums increase, the value of their loan portfolio decreases. As the value decreases, the credit lines that are secured by those portfolios begin to issue margin calls as the value of the asset that they are secured on is now diminished. This is exactly like margin calls in the Stock market. If you have a loan against a Stock that is losing value, you will get a “margin call” and need to pay down the loan, as the underlying Stock is losing too much value to be considered adequate collateral any longer. So for the big lenders, as their portfolio is losing value due to increased risk premiums and losses…the margin calls start coming in, and they are required to pay down their balances. In turn, this means that they have less availability to fund their new loans, which then exacerbates the problem.

In response to seeing this situation play out in the demise of American Home Mortgage, lenders of other non-conforming loan products increased their interest rates dramatically almost overnight to be better prepared - and likely over-prepared - for increased risk premiums down the road. Even though loans above $417K are not presently suffering from increased delinquencies like the Subprime and Alt-A loans are, these rates popped higher as well, because they are being purchased by smaller private entities that can’t afford to take on any margin of risk.

What happens next, and what should you do now?

The present situation will likely settle out over the coming year, and the rates on products that have moved so significantly higher now should trend lower down the road as delinquency rates stabilize. But here are a few important things to do right now.

First, even if you are not presently in the market for a home loan of any type, call me to make sure that your credit standing is as solid as possible. Many people I talk to about home loans didn’t expect they would have a need, and didn’t plan in advance to ensure their credit would qualify them for the best possible financing. With no immediate need for a home loan, time is on your side…why don’t we take a few minutes together and just make sure you are prepared, should a need arise down the road?

Next, if you are in the market for a home loan, or know someone who is - know that now is time to be working with a real qualified professional who can keep you informed of changes in the market and get your loan funded quickly. Now is NOT the time to be playing the risky game of trying to scour the entire nation to find someone who promises to save you a paltry amount on costs, or deliver a rate that seems too good to be true. Your home and your financing are just too important, and times have changed. I am here to help and advise during these volatile times - and would welcome calls from you, your friends, family, neighbors or coworkers

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August 20, 2007 by Mimi Miller.

Dear Mimi,
My crawlspace smells really musty a lot of the time. I laid black plastic down but when it rains the smell gets worse. Is the plastic not working or do I have a bigger problem?

~Smells in Superior
Dear Smells,
Every crawlspace eventually gets water in it or through it. The real issues are: 1) how long the water stays in the crawlspace; 2) what the water might get wet when it passes through the crawlspace and, in your case; 3) how effectively the black plastic is installed. Here are some additional thoughts. Many crawlspaces also need an effective sump pump that is able to run 24 hours a day. The pump comes on automatically when water goes into the sump pit and goes off automatically when the water in the pit drops below the float. If there is anything in the crawlspace that gets and stays wet, that will give off an odor. If the material is organic - cardboard, wood, paper and the like - it will smell and could create a mold problem for you. Most every crawlspace could benefit by installing a good “vapor barrier”. This is a heavy plastic that covers the entire floor of the crawlspace and goes up and is attached to the foundation walls. If your vapor barrier is not installed properly then, for all practical purposes, you are doing more harm than good.

Mimi

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August 20, 2007 by Mimi Miller.

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August 20, 2007 by Mimi Miller.

The mortgage crisis could develop into a bigger problem for small business! Here is a Denver Post article about what might happen!the-denver-post-small-businesses-stung-by-mortgage-crisis.htm

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August 20, 2007 by Mimi Miller.

I thought you might enjoy this article.

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August 20, 2007 by Mimi Miller.

Dear Clients:

I will be forwarding information from some of the lenders about the current Mortgage meltdown. Here is a pdf file taken from Cherry Creek Mortgage Company. Please share your thoughts.

Mortgage Meltdown FAQ

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