Chico CA Real Estate Mortgage Meltdown

by guest writer Mike Wiegert, broker, Chico Homes

SUBPRIME! TEASER RATE! ADJUSTABLE RATE MORTGAGE!

Locally, these terms were once only known to those people that worked in the Chico CA real estate or mortgage business and a small percentage of people that took an actual interest in the workings of national mortgage markets. Today, these words are commonly known to anyone who reads a newspaper or watches a daily news program.

Our newfound familiarity with mortgage terminology is primarily due to the recent crisis surrounding a near collapse of the sub-prime mortgage markets. Why do they call it market? Because, essentially that is what it is, or was. In recent years, Chico homebuyers and those refinancing existing Chico home loans had a huge array of loan programs to choose from. Much like your favorite grocery store, some of these products were sensible and had value in the long run. Other products were just a quick way to get a new homebuyer, often with low or marginal credit scores into a Chico property with little regard for future events.

A commonly used mortgage in the sub-prime market is the 2/28 ARM. This is an adjustable rate mortgage where the rate is fixed for 2 years, and is then reset to equal the value of a rate index at that time, plus a margin. Because sub-prime margins are high, the rate on most 2/28s will rise sharply at the 2-year mark, even if market rates do not change during the period. This means that while the loan is affordable to the borrower at the initial rate, it may not be affordable after two years when the rate is reset. This type of mortgage is really only of value to borrowers who are assured of certain events that involve a significant increase of income, a situation that is unusual to most of us.

For the average wage earner, a dramatic increase in housing payment is a formula for disaster. Therein lies the problem: a sharp rise in mortgage defaults and foreclosures of those once euphorically happy homebuyers. So whom do we blame? We could blame the eager and enthusiastic Chico mortgage lenders who promoted the loans, rationalizing the validity with the forecasts of increasing appreciation of the homes. We might take a swing at aggressive Chico CA Realtors, also believing that these products were the only possible way for their customers to realize the great American dream of homeownership. We could hold responsible the Chico homeowners themselves for getting caught up in the buying frenzy with little or no regard for their own future.

How many people out there have ever bought a car that they couldn’t afford, only to have to sell it for a loss and absorb the shortfall? Why blame any particular person at all? We all got into this mess together, and we all are feeling the results as the issue resolves itself. So, how is this glob of knots going to untie itself? I don’t think that anyone has a convincing answer to that monumental question.

Treasury Secretary Henry Paulson discussed a plan at a meeting with top banking regulators and industry representatives last Thursday and is expected to announce details of the proposal this week.

The plan would freeze mortgage rates for stressed borrowers who took out loans with low teaser rates that are due to reset to a much higher level. The obvious benefit of such a plan would be that these borrowers would, for the time being, be able to hold on to their homes. At the same time, the lenders won’t be inundated with foreclosures, thereby forced to open large departments to deal with holding, maintaining and marketing these properties.

Many folks are really angry that the Federal Government would step in and bail out lenders that are experiencing high rates of foreclosures, and help individuals desperately unable to afford the higher payments of their newly reset mortgages.

Ultimately, they feel that these foolish lenders and borrowers will be sponsored by the American taxpayer and in truth, they are right. It’s always the taxpayer dollar that is used to support a national crisis, isn’t it?

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