The turmoil in the subprime lending market continues to ripple through other markets. Though subprime loans are estimated to be only 13% of outstanding loans, and only 13% of those are late on their payments (1.7% of the total), investors are averse to the risk of possible loan defaults.
The Dow Jones industrial average has been erratic with triple digit swings in the past two weeks. A large French bank halted withdrawals from three investment funds that are tied to high-risk U.S. mortgage securities. They were unsure as to how to value the funds anymore. Commercial banks in Europe have been hesitant to loan to one another, causing short-term rates to rise. The Central Bank poured $130 billion into the banking system to shore up available funds, lower rates and calm investor fears. The U.S. Federal Reserve also injected $38 billion into our own banking system. They also allowed banks to use mortgage backed securities as collateral, attempting to show that these securities are still reliable. Speculation varies as to whether they will lower the federal funds rate at their next meeting.
Lenders are having trouble selling mortgage backed securities on the open market. By selling these bundled loan packages to investors, lenders get more funds to loan out. As fears of loan defaults grow, investors have stopped buying any loan packages that have any subprime loans in them. Many subprime lenders have gone out of business as they can no longer obtain new funding. Even prime lenders have tightened their guidelines significantly over the past month or so.
What does all this mean to you as the home buyer? Basically, it is more difficult to buy a home right now. There are fewer lenders and fewer loan programs to choose from. This is especially true for buyers looking for 100% financing. You must get a pre-approval ahead of time to be sure you can obtain financing before you bother to look for a home. It is even more important now to use an Integrated Agent to purchase your home. Your Integrated Agent will be intimately involved in both the real estate and the mortgage portion of your transaction. With the mortgage industry changing daily, you can’t afford to have any more uncertainty in your purchase.
