Watching the Sub-Prime Loan Avalanche Slide Down The Hill….

It’s not much of a surprise, really…. except for the media, who’s ‘discovered’ a juicy new topic to obsess on.  And for the politicians, who definitely knew about it but can now create succinct sound-bites to further their campaign.

Hot News Flash for those who were asleep at the switch- there’s been too many loans made to people who can’t repay them. Mortgage defaults are on the rise. Banks are losing money- as is Wall Street, who gladly invested in these banks when the money was flowing. And Mother of all Mothers- there’s actually been crooks and thieves taking advantage of the system.

The avalanche is currently only about mid-way and gathering steam. There’s been over 24 mortgage companies that have gone bankrupt since the start of 2006. New Century Financial Corporation, the 2nd largest US lender to subprime applicants, has stopped making new loans. Countrywide Mortgage shares have fallen and they have cut 108 subprime jobs in their wholesale lending department. Increasing interest rates on Adjustable Rate mortgages are going to tip some borrowers over the edge. Predatory lending tactics on credit risky uninformed buyers has increased. Last of all, the problem of buyers’ extremely suspect transactions are causing state and federal eyebrows to raise.

Expect much more to come…. public and political outcry, legislative investigations, ‘in-depth’ news reports, etc. etc. etc.

Is this the ‘end of the world as we know it?’  Not exactly. When the snow has settled and the final damage assessed, there will be a few good (and not so good) changes:

1. Those with golden credit are going to be even more golden. Bankers and investors love a safe bet, and those buyers with a good credit history are going to be in hot demand. Use common sense, keep your bills paid and up to date, and the offers to lend you money are going to pour in… with a good chance of enticing incentives to tempt your wallet.

2. Those with bad credit are going to find it harder to get a home loan. Interest rates will be higher, qualifications tougher, and the 100% financing with no money down will be a lot harder to come by… if it exists at all.

3. FHA loans will become more popular.  With a minimum 3% down payment, and the (still available) possibility of having the seller assist you with this money, there will be a resurgence of this type of financing.

4. The increase in bank-owned homes will be here for a while. If you live in a neighborhood with many bank-owned homes on the market, your property’s value is definitely going to suffer. Eventually, this trend will shake itself out…

5. People will cry, banks will fold, government will wring their hands (and ask for your vote), crooks will go to jail….. and Life will go on. The majority of folks will not have this impact their lives at all. 

To prevent being an avalanche casualty, save your money wisely, pay your bills on time….. and do all those common-sense things your Mother told you to do all along.