LEGAL NOTES

Everywhere we turn, we are seeing the fallout from subprime mortgage loans—those made to people with low credit scores. It is an understatement to say that this situation and the so-called “credit crunch” is making things more difficult for Real Estate professionals and consumers alike.

Home foreclosures spiked in the United States this year, largely due to the growth of subprime loans over the past few years. In the peak of the housing market, almost anyone, it seemed, could get a loan. As one analyst put it, underwriting standards became so lax that “if you could fog a mirror, you could get a loan.” Unfortunately, the pendulum has swung to the other extreme, and as a result the Real Estate industry as a whole is suffering.

The rise in subprime products that include risky features—combined with loose underwriting standards—has placed many subprime borrowers at risk of foreclosure. According to the biannual Federal Reserve monetary policy report to Congress, delinquency rates for subprime adjustable rate mortgages—which made up about 9 percent of all outstanding first lien mortgages—have rapidly increased across the United States.

During the first half of 2007, subprime mortgage delinquencies increased to more than 12 percent, which is the highest they have been in six years. Many of those borrowers have been unable to make payments because of the terms of the loans, which can include skyrocketing interest rates after the low initial rates expire. As a result, hundreds of national and local subprime mortgage brokers have gone out of business and federal lawmakers are examining ways to further tighten mortgage lending standards.

Investors are now scrutinizing subprime loans more carefully and, in turn, lenders have tightened underwriting standards. A recent Federal Reserve survey shows that 60 percent of the 40 banks offering nontraditional loans tightened their standards for home loans. Most banks reported that demand has slowed for subprime and nontraditional mortgages. Many traditional lenders have removed nontraditional lending products from their offerings entirely. For example, Wells Fargo significantly reduced its product line when it dropped several of its adjustable rate mortgage offerings. Many other lenders have limited the loans they will write based solely upon a borrower’s stated income, now requiring full documentation of both income and assets before making a loan.

For homebuyers, this means that less credit is available and loans are harder to obtain. While just a few years ago, a couple with bad credit and low income could obtain a $400,000 loan with little hassle, that same couple would find it difficult today to obtain a loan for a substantially smaller amount.

The subprime crisis is also influencing home values. A Reuters/University of Michigan survey of consumers showed that 26 percent of national homeowners reported a decrease in their home values in November. And a surge in home foreclosures in the coming years will cause U.S. property values to sink by $223 billion, according to a recent report by the Center for Responsible Lending. The report estimates that 44.5 million households will see their property values drop by $5,000 on average as mortgages sold in 2005 and 2006 to borrowers with weak credit reset at higher interest rates.

Many analysts believe that the subprime mess may get worse before it gets better, predicting higher delinquencies and foreclosures for years to come. Therefore, Real Estate professionals need to be aware of the situation and realistic about the industry. Simply stated, subprime loans, such as income-stated loans, pick-your-payment loans, negative amortization, and interest-only loans, are either dead or on life support. The reality is, unless your buyers have good credit and a hefty down payment, they may be shut out of the market.

As an agent, it is important to communicate to sellers that they are in a slowing housing market. For those who have seen dramatic increases in their property values over the past few years, it may be difficult to accept the fact that their home is worth much less than it was just a couple of years ago. It is important that they price their homes realistically. In today’s market, an overpriced home may never even get shown.

Agents need to be careful when it comes to wasting time. By asking a few hard questions about finances and credit, you can save yourself and your clients time and money down the line. Make sure your clients and anyone who is making an offer on your clients’ homes have been recently pre-approved by a reputable lender. For your potential buyers, do not waste time showing them a home without checking them out first. For your potential sellers, screen all incoming offers carefully. Pay particular attention to any financing contingency, and force the buyer to be specific about the type of loan, number of years of repayment, and the rate. Buyers will want as much flexibility as possible to account for an unpredictable lending market. With fewer buyers in sight, sellers cannot afford to take their homes off the market only to have the deal blow up two months down the road because the potential buyer cannot obtain financing.

The good news is that it is an excellent time to buy if you have a qualified buyer with a significant down payment. Selection is abundant, prices are down and interest rates are low by traditional standards. And by carefully screening buyers, and by advising sellers about the realities of the credit crunch and the realistic value of their home, agents today can avoid getting hit by the fallout of the subprime tsunami.

Disclaimer: The above is not intended to be, nor is it legal advice, and should not be relied upon for any reason. Even though this article maybe disseminated throughout the U.S., the material covers only Nevada law, and no other. E RealEstateExec and Exec MediaGroup, LLC expresses no opinion on any other state's law, nor about the handling of any particular legal situation. You should consult your attorney, accountant or business advisor before undertaking any action. No attorney-client relationship is created between E RealEstateExec, Exec MediaGroup, LLC and the reader.