The Mortgage Blog

I don’t have to tell you the extent of trouble the mortgage industry is in right now. The real cause of the problem though, is not ARM loans adjusting; it’s declining real estate values. Conventional “A” paper ARM borrowers who are adjusting today are getting new rates in the 5% range and even most sub prime borrowers are adjusting to the 8’s and 9’s. Most ARM loan adjustments this year will be close to the rate the borrower had previous to the rate adjustment. This is clearly not going to push anyone out of their home. Declining values are the main culprit behind the current problems.

Dropping real estate values have also created a huge problem for second mortgage lenders. In the event of a foreclosure a second mortgage is by definition second in line behind the first mortgage to collect from the proceeds of an auction or sale of the property. In many cases the second mortgage debt is wiped out and the second lien holder gets zero. Ouch.

Over the past 6 months some of the largest wholesale home equity lenders – Chase, National City and Fifth Third Bank have all exited the business. I actually can’t name a single bank that we can broker a stand-alone equity line of credit to right now. The absolute highest available second mortgage I know of today is to 90% of the homes value and can only be done in combination with a new first mortgage through the same bank.

The trouble has also extended itself to people who have existing home equity line of credit loans. Many banks have decided to reduce available credit limits and or freeze new advances on existing borrowers. This can come as quite a shock if you have a loan in place and were planning to make some improvements to your house using the line and suddenly you get a letter stating you can’t borrow on it anymore! I have been a long time proponent of the equity line as a handy tool for short term financing needs and frequently have recommended my clients open one. If you aren’t using it it generally isn’t costing you anything, but if you happen to need it it sure is handy.

I’ve had a number of clients call me and ask if the lender can just arbitrarily freeze or reduce the available credit on their loan. The answer is yes if the loan documents that were signed allow it. In most cases this is something that is possible if the lender chooses to exercise it. Reducing the available limit on a line of credit is one way for the lender to protect themselves from further losses and ensure that adequate equity remains in the property.

The problems we are facing in real estate and mortgages are only going to resolve themselves as the number of foreclosures reverts back to historical levels. This will ease the downward pressure on home prices and allow the real estate market to stabilize. As we enter the second half of 2008 it appears that it’s still going to be a little while before we see that materialize in many parts of the nation, however, I do believe we are at or near the bottom here in southeastern Michigan and should start to see the light at the end of the tunnel as we enter into the 2009 selling season. Stay tuned . . . . . . . .