On Friday, August 3rd American Home Mortgage officially closed its doors. That same week Standard & Poor’s cut its outlook on Bear Stearns from stable to negative amid fears of firm wide exposure to subprime lending and the leverage finance market. If all that were not bad enough, the leveraged financed market has essentially shut down. The questions on everyone’s mind are: What is next, how will this affect the housing market, and will loans be available in the near future?
To start on a positive note, yes, there will be plenty of loans available in the near future. Unfortunately these loans will only be available to borrowers with good to excellent credit, who have a reasonable down payment (5-10%). Mortgage lenders and banks have gone beyond scared to downright petrified because they can only see the tip of the iceberg. For the readers out there who are not familiar with icebergs, typically everything above the surface (what one could see) represents 10% of the total mass of the iceberg.
Continuing with that analogy, most analysts expect this situation to get significantly worse before it gets better. While Bear Stearns and American Home Mortgage have been the latest news whipping boy, the market has quietly downgraded many (if not all) banks and mortgage lenders. Furthermore, banks know exactly what they are holding, whether they admit it or not. To soften the final blow, expect them to raise rates, charge higher fees, and tighten their approval process. Even though many financial institutions are being very hush-hush about how much of the bag they are holding, they are diligently working to limit any future exposure.
For a borrower that means anything outside of plain vanilla conforming loans will be very hard to come by. But we here at Bloodhound would be remiss if we only gave readers the gloom and doom story. Despite all of this, here are some suggestions that might help ease some of the burden for those currently looking for financing.
Get a GREAT Mortgage Broker
While this could be my Bloodhound tag line, this is the time where it will pay dividends. Many lenders have been changing their policies, leaving buyers who were previously approved out in the cold. Mortgage brokers that have been around for 20 years or more will have been here before. They will be able to provide excellent advice and great service at a time when both are at a premium.
Push for Seller Financing
As the mortgage crisis continues to worsen, sellers will become desperate. Many sellers are already experiencing higher than normal time on the market. This is just the beginning for many of them because a large number of buyers across the United States simply cannot qualify for financing right now. With less eyes looking at property, sellers and their agents will have to get creative. Financing is a good negotiating tool because it can reduce the total borrowing amount and bring more buyers to the market. Both parties win.
Communicate, Communicate, Communicate
Now is not the time to take the attitude of “everything will be alright.” Stay on the mortgage broker and the bank to ensure things are going according to plan and make sure they have a back up plan. Ensure all contracts have good financing contingencies, which at a minimum give you more time if the bank fails to provide you expected financing.
Sellers be Vigilant
Sellers should be vigilant about pre-qualified buyers. Ensure the buyer has taken adequate precautions and will be able to come to the table with the finances. Now is the worse time to have to put a home back on the market because a buyer is not able to close. As tempting as an offer will be in a market with a reduced number of buyers, it is imperative to hold out for a good offer. In this situation a good offer is a price a seller can live with from a buyer that can definitely close.
While the current market is not all gloom and doom, it is closer to trouble than it has been since 2001. Expect it to get worse before it gets better.
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