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Mortgage Mania - Part 9 The Capital Markets Strike Back

Chris Iverson, Realtor

July 31st, 2007 · No Comments

This whole subprime / mortgage industry meltdown hullaballoo is getting a little surreal, so forgive the Star Wars reference. This article in today’s New York Times reports that trading in shares of American Home Mortgage never opened yesterday, after the company announced following the market close on Friday that “it would suspend its dividend and was facing “significant margin calls” from its banks. “. I’ll bet that made for a fun-filled weekend for AHM execs . . .

This comes hot on the heels of last week’s announcement by the nation’s largest mortgage lender, Countrywide Financial, that it was seeing rising incidences of default on second mortgages to prime borrowers. Second mortgages to prime borrowers?!? Hey, isn’t that how we buy houses here in Silicon Valley if we didn’t get a job as a janitor at Google a few years ago? Uh oh . . .

So I rang up Andy Block at OPES Advisors, and asked him for some thoughts on all this, specifically how it is going to affect the purchasing power of my client Patrick. I mention Patrick because he is a “typical buyer” these days. He and his wife both have six-figure income jobs, and will net around $250K from the sale of their current home. They want to move from their current home in San Jose to Los Altos or Mountain View to get their kids into better schools, while getting a bit larger house. Andy had reviewed their income, credit, investment and retirement plans, debt, etc. etc. and came up with a range of $1.3M to $1.5M as a purchase price for their next house. They did the analysis about 3 months ago, because they are planners. Does this sound familiar?

It looks like the current changes in lending guidelines and interest rates are going to cost these folks about $100K or so in buying power, all other things being equal. Bummer.

I also chatted with Eric Trailer at Absolute Mortgage, and he agreed that we are seeing a period of adjustment, and that things should stabilize in 6 months or so once the regulatory reaction and new lending guidelines have had a chance to “work their way through the system”.

Both of these resources reminded me that mortgage interest rates are still 7% or less for borrowers with good credit, which are historically low, so don’t panic if you are in the market, and stay in touch with your lender if you have a pre-approval that is more than 30 days old.

Thanks for reading.

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