Sub-Prime Meltdown!

The headlines are once again full of news from the mortgage and real estate front...and this time, the "Sub-Prime meltdown" is taking center stage. What exactly is going on, and what does it mean to you?

A "Sub-Prime" home loan is a loan where the client has some significant credit issues, or was otherwise unable to qualify for a standard, conventional loan. Due to the fact that these loans tend to be quite risky for the lender...they also bear higher interest rates to match, as well as often being adjustable rates that likely have recently hiked sky high, not to mention the steep prepayment penalties they generally carry.


These loans have been around for years—so why all the drama now?

Many Sub-Prime and other adjustable home loan rates have moved dramatically higher, due in part to the Federal Reserve Boards recent rate hike cycle. So as these rates are adjusting higher—and the payment right along with it—the homeowners are finding that they are unable to keep up with the dramatic increase in payment.

In the past, homeowners in this situation would simply throw the house on the market, realize enough of a profit to cover any prepayment penalties, and literally move on. But the soft real estate market isn't making this quite so easy any more—houses are not selling as quickly, and the home appreciation rates enjoyed in the past have moderated.

So the Sub-Prime homeowner is stuck—and many of these homes are falling into foreclosure, causing even more problems. As more and more loans are defaulting, mortgage lenders are forced to tighten up their lending standards across the board in response...making it tougher for a troubled homeowner to even refinance to get out of trouble. Many Sub-Prime lenders are feeling the pain, and in some cases, actually being forced to close their doors as they are hit with all the defaulted loans and foreclosed properties coming back home to roost.


How does this impact you?

In the short term, home loan rates are benefiting, as the stock market is taking a beating, causing money to flow into Bonds and Mortgage Backed Securities, which benefits home loan rates. But the longer term picture may spell higher interest rates ahead, as lenders have to absorb the cost of the loans that went belly-up, combined with the cost of increased compliance and accountability standards.

Now in many cases, the advice and loan strategy given to the client was perfectly appropriate for the client at the time they took out the loan…but the “perfect storm” of colliding economic events may have just worked against them. Yet unfortunately, many homeowners are paying a very steep price for what may have been poor advice and counsel given them at the time of their home purchase or refinance. Now more than ever before, it is clear that it pays to work with a true professional, especially when your home is on the line. If you've ever thought it's too expensive to work with a real professional...just wait until you work with an amateur. The price paid is clear—and in this case, it's a very painful one.


Because of these events, credit and lending standards are tightening across the board—so it's also a very wise idea to make sure your own credit score is as high as possible.

As you probably know, I regularly invest in my business to make sure I have the best tools and systems available to serve your needs. One of the programs that I have recently invested in is called the Credit Paradigm, which allows me to analyze your credit and give you a detailed report of the actions that can be taken to increase your credit score—all at no charge to you. I've already made the investment in this service on your behalf, because I want to ensure that my clients receive a level of service unlike what most would expect. We build relationships for the long run, not just to provide a "transaction"—so although you may not have a need for my home loan services at this time, I'd like you to take advantage of the investment I made and allow me to provide you with your own personalized instructions for improving your credit score—even if it's already great!

Just give me a call or email—I am always glad to hear from you on this matter, or any other questions you might have. By the way, I would be glad to extend the Credit Paradigm offer to anyone in your own network as well, so please feel free to refer your friends, family members or coworkers to take advantage of this valuable program.

Looking out for your best interest, your Trusted Advisor,

Sean La Rue