Big Ben Cries Out but is it all Bad News?

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Big Ben Cries Out but is it all Bad News?

October 16th, 2007 categories: Buying, Real Estate Finance, Real Estate News

Late yesterday, Federal Chairman Ben Bernanke said the collapse of the subprime market will be a “significant drag” on economic growth. He felt recovery from the recent credit crunch could take longer than expected to resolve and the current housing slump may continue well into 2008.

Some took his comment to pledge “to act as needed” to help financial markets and keep the economy and inflation balanced as a sign that the Fed may cut rates again on October 31^st. Others felt his comments yesterday meant the Fed would leave key interest rates right where they are now. (Click here to read more) Everyone is talking about the housing market and everyone has an opinion, but what does all this really mean for those of us who desire to own a home?

With the collapse of the credit market, investors have virtually zero appetite for jumbo loans (loan amounts above $417,000). Of the investors still willing to purchase jumbo mortgages from banks, they are doing so at a discount forcing banks to raise interest rates to consumers to cover the loss they will take when they sell those loans.

Does that mean you can’t get a jumbo mortgage? No, jumbo mortgages are still available usually at higher interest rates and they are a little harder to qualify for. For someone with a credit score above 700, and at least 10% equity in the property, lower interest rates are offered by local portfolio lenders. A good mortgage broker can suggest alternative sources of financing for well qualified borrowers-Wall Street Money is not the only source.

Where is the “sweet spot” in the market right now? Conforming, conforming, conforming! (Loans of $417,000 and below). Fannie Mae and Freddie Mac are still happily purchasing these loans on the secondary market. Because lenders can sell these loans easily thereby freeing up more money for them to turn around and make more loans (think profit $$$$$), LENDERS WANT CONFORMING LOANS in their portfolio.

And to attract these conforming loans, they are offering fantastic rates and easy qualifying guidelines. Imagine this scenario, the home you have always wanted was just outside of your reach at $500,000. Now with the current housing slump, the seller has lowered the selling price to $435,000. You have a good credit score and a little savings, what would it take to buy it and what would your payment be?

Assuming you put 5% down payment:

Loan Amount $413,250

30 year Fixed Mortgage with a 10 year interest only option

Interest Rate 6.375% @ 1 point

Monthly Payment $2,195.39

MI & Taxes $598.13

TOTAL PAYMENT $2,793.52

Considering the tax advantage of home ownership, this is the equivalent for most people of a $2,000 a month rental payment. Your real estate agent may be bale to negotiate for the seller to pay for your closing costs. Furthermore, in order to attract buyers, lenders are making the process very easy. Many people qualify for reduced paperwork—no need to dig through the filing cabinet for bank statements and tax returns.

The bottom line: everyone agrees we are in a housing slump. While there is much debate over when we will see the end of the slump, most agree there will be an end. In the meantime, if you are looking to purchase a home and know you will be there for a few years, there is definitely a “sweet spot” where home prices, interest rates, and lending guidelines intersect.

Lysa Catlin

Vice President

CMC Finance, Inc.

(858) 456–3000 office

(858) 456–6200 fax

This entry was posted on Tuesday, October 16th, 2007 at 11:09 am and is filed under Buying, Real Estate Finance, Real Estate News. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.