Last week I tried to end the series of pieces on the mortgage liquidity crisis with as assertion that rates would get better. I still believe so but the problem in 2008 will be that some people will not be able to refinance and will be pained by their adjustables.
Whom will that affect?
Not exactly sure but here are some folks who will be totally annoyed with the mortgage industry next year:
- B-paper borrowers who will not be able to qualify for new mortgages with full documentation.
- some stated income A-paper folks who are not self-employed. "Stated" income used to be for self-employed folks only. The rationalization was that the self-employed sometimes beat the heck out of their Schedule-C in an effort to minimize their tax liability and that their "real income" is something higher than the bottom line on Schedule-C. For example, they might write off their car payment, gas, parking, medical insurance and some travel.
W2 people have incomes reflected on their W2s so it is a bit harder to conjure a rationalization as to why they should be allowed to go "stated." When all is said and done the question will be asked: are the default rates for stated W2 any different that the default rates for self-employed?
- folks who live in places where property values will decrease. Las Vegas, Miami, Phoenix and others will see drops in values simply because those places have seen significant amounts of speculative buying. I would think that the default rate on non-owner occupied A-paper is going to be a lot higher than owner-occupied A-paper.
The problem in these markets will be lack of equity. Lenders are not going to do 105% LTV refinancing.
Lurking here are some issues. There are going to be more people who have to sell and then rent. In some places that will be that rents will go up while values are going down. This can even translate into displacement as folks can only afford outlying communities.
Speaking of Disasters
If your lender goes out of business please pay attention to your impounds for taxes and insurance. This is one of those ugly stories. It has been alleged that recently-out-of-business American Home tried to used borrower's impounds for taxes and insurance to cover their overhead. The problem is compounded by the fact that no one has been able to get hold of the physical loan files to even ascertain which insurance companies have not been paid.
My point here is solely this. If your mortgage company goes out of business the ownership of the mortgage and the liability that you have to send the check continues but if a mess like this takes place please make sure on your own that your taxes and insurance are paid. If the lender scammed your money that is no excuse you still need to pay your insurance company. With taxes there is some "catch up" time but that does not exist for insurance.
The messages are 1) make sure that you make your mortgage payment even if the lender is going under and 2) make sure that your insurance and taxes are paid. Insurance must get first priority.
Dick Lepre
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