Subprime loans - Should Palo Altans care?

March 29, 2007

If you are a reader of The San Jose Mercury News, or any other paper or media outlet, you know that there is a growing issue associated with home buyers who purchased their homes using subprime loans and are now facing foreclosure as they are unable to keep up with their payments when their rates adjust.

On Sunday, March 17, the San Jose Mercury News ran an article describing how an agent and lender with Century 21 Su Casa Realty violated a number of lending laws and ethical guidelines to get people to purchase homes which are now in foreclosure, in some case because the buyers couldn’t even afford the first payment.

While it is a stain on the already tarnished image of Realtors, it is easy for us in Palo Alto to say ‘what a shame, it won’t happen here’, or words to that effect. But, what is the effect of this issue on homebuyers in Palo Alto and the surrounding communities?

Rachel Van Emon with OPES Advisors, a financial services firm with offices in Palo Alto and San Mateo, recently sent me an article that discusses the effects of impending legislation and revised lending guidelines that will affect the ability of buyers to qualify for products like the interest only loans that so many of us use to buy our million dollar teardowns in Palo Alto and surrounding communities.

The highlights are:

  • The Department of the Treasury has issued a Guidance on Guidance on “Nontraditional Mortgage Product Risks.”
  • The Guidance specifies “nontraditional” as those loans allowing the deferment of principal and/or interest payments – not just sub-prime loans.
  • The Guidance states that borrowers for these products are to be qualified at the “fully amortizing and fully indexed payments.” This means that qualifying payments will be bigger, and it will take more income to qualify.
  • The new guidelines are to be in effect by 9/07. Some lenders have already adopted them, and many more will do so in the coming months.
  • Virtually all lenders have cancelled their programs allowing 100% financing on a Stated Income basis.
  • Guidelines have tightened around lending when other “risk factors” are present such as 100% financing, low reserves, high debt-to-income ratios and condo properties.

In short, it’s going to be harder to pay for that million dollar teardown in Palo Alto starting now, and especially in September.

The big question is whether these changes in lending laws will cool the red hot housing market we are currently enjoying, or if the Valley’s amazing ability to generate disposable incomes and wealth will overcome another hurdle to home ownership. Stay tuned . . .

The entire article is posted for your reading pleasure. Click here to view it.

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Written by Chris Iverson, Realtor · Filed Under Bad Realtors, Crooked realtors, Financing Process, Loan Application, Mortgages, Negative Amortization, No Documentation (ND), No Income No Assets (NINA), No Ratio (NR), Option ARMs, Real estate, Realtors who give the business a bad name, Stated Income Stated Assets (SISA) | 5 Comments