Hitchcock Happenings

All the talk and hype about the so-called "Subprime Mess" has most homeowners scratching their heads.  So what does all of this mean and what impact will it have on you?

Subprime lending refers to the practice of making loans to people who typically would not qualify due to credit problems.  However, since federal money for lending has been so easy to come by, and interest rates have been so low for the last 5-10 years, lenders have been willing to make loans to riskier consumers.  Why would they do this you ask?  Because they could make a lot more money lending to riskier people by charging them much higher interest rates.  Additionally, many of them will make their payments just fine, and the few folks that default on their loan are nothing compared to all the additional revenue lenders make off this huge piece of the pie.

The "mess" has come in lieu of rising interest rates over the last 12-18 months.  Millions of these "riskier" homeowners have interest-only and adjustable rate mortgages (ARMs) which are becoming increasingly difficult to make their monthly payments.  This is because their monthly payments fluctuate based on the federal prime interest rate.  With monthly mortgage payments rising for the homeowners who are least equipped to handle it, the foreclosure rate is climbing.  As they fall a month or two behind in their payments, they try to sell their home rather than foreclose.  This has led to a significant increase in the number of homes for sale.

Congress is considering forcing the lenders to tighten up their criteria to protect consumers from "predatory lending", but this may worsen the problem as these homeowners attempt to refinance their way out of these high-interest loans.  Additionally, as interest rates rise and the banks tighten up their lending criteria, there are fewer buyers who qualify for a mortgage.  As a result, there is an abundance of homes for sale and a shortage of qualified buyers.  This has created a bit of a "Buyer's Market" temporarily while the real estate market corrects itself.  Due to this shift in the market which favors the buyer, people looking to purchase a home can find some decent deals, but they need to work with a realtor to find the best house and negotiate the best deal.

Likewise, in a buyer's market, it is vital that homeowners who are looking to sell be working with a realtor who can effectively market their home.  Sure, when the market was sizzling hot and interest rates were so low that anybody could qualify (coupled with subprime lending practices), many homeowners were successful in selling "by owner".  But with so many homes on the market, so few qualified buyers, and an average market time of 4-5 months, you'll save time and money to work with a realtor.  You'll avoid a lot of stress and save yourself many mortgage payments by getting the price set appropriately and marketing the home effectively.