SMCU Money Masters - Winter 2008 - (Page 14)

money management Navigating the New Mortgage Environment By L. G. Mansfield Richard and Janet Forrest wanted to buy a home, but their credit scores were less than impressive. Both had missed several payments on their credit cards, and Richard previously had a car repossessed. They found a subprime lender who was willing to give them a mortgage, and it wasn’t long before they closed escrow on a three-bedroom house. Lucy and Mark Avalon were newly married, with one credit card between them and a combined annual income of $47,000. Anxious to start carving out their future together, they were hoping to find a place to buy instead of continuing to rent. At the suggestion of a friend in the real estate business, they secured a subprime loan. Within three months, they were the proud owners of a fixer-upper with lots of potential. In both cases, the couples’ mortgage rates were high — even more so for the Forrests because of their bad credit. But the plan was simple and seemed to make sense: Get the loan (even though it wasn’t a great one), move in, work on building or repairing their credit, then refinance at a lower rate and live happily after. From the lenders’ perspective, the risk appeared worth it. After all, the higher rates they charged would pull in more money in interest payments. What’s more, opting to lend to people who posed a higher risk meant that the pool of potential borrowers was larger than before. Standards that were fiercely adhered to in the past were loosened considerably, as visions of mortgage after mortgage danced in their heads. So loans — a lot of loans — were made indiscriminately. Mortgages were extended to individuals with low FICO (Fair Isaac Corporation measures credit risk) scores and to people with no down payment. Loans were made with more than 100 percent loan-to-value ratios, and interest-only mortgages were offered to people who may not have realized the potentially adverse effect of not making any principal payments for several years. It was an unrealistic bubble that was destined to burst. Although the strategy worked for some, it failed miserably for others. Escalating interest rates dramatically increased the monthly payments on adjustable-rate mortgages. The housing market lost some of its robustness, causing property values to drop. Loan defaults were abundant. Lenders closed their doors. And consumers lost their homes. Fortunately, while much of the mortgage industry was dealing in subprime loans, credit unions took a more conservative stance. Their traditional strategies of lending still held true, and they remained focus on benefiting the borrower, not making a quick buck. Their goal was to make sure that they matched the right mortgage to the right member, offering affordable loans that could be easily refinanced when necessary. The bottom line: Credit unions still have mortgage money to lend — at great rates — for their members. Let SMCU Show You the Way Home For information about home loans best suited for your needs, log on to www.smcu.org, call our Real Estate Information Line at (650) 363-1799, or visit a branch. LENDER EQUAL HOUSING 14 WINTER 08 http://www.smcu.org

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SMCU Money Masters - Winter 2008 Contents Tech Tips Community Connection What’s Next? Motley Fool: A Tale of Two Borrowers Jean Chatzky: Extreme Jobs Member Tips Money Management

SMCU Money Masters - Winter 2008

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