Hearings by the Senate Banking Committee and by the House Financial Services Committee into the much-publicized troubles in the U.S. mortgage market have called attention to a problem that could ultimately affect a wide swath of consumers. Here’s what you need to know:
The Mortgage Bankers Association reported in mid-March that mortgage delinquencies in the fourth quarter of 2006 rose to 5 percent of the overall mortgage market. Worse, loans entering foreclosure in the same period reached a record high, even when seasonally adjusted. Of the 50 states and District of Columbia, 49 saw their overall delinquency rates rise, while 44 saw an increase in foreclosures.
Subprime mortgages–home loans offered to people with spotty or bad credit histories–were largely responsible for the rise and are likely to continue to push up the default rate until the end of 2007, the association said.
Homeowners who took out subprime loans two or three years ago at low, fixed “teaser” rates are reaching the end of their introductory periods and seeing their interest rates rise sharply. As home prices have dropped, many of those who borrowed at or near 100 percent of the purchase price can’t refinance and may owe more than the value of their homes.
Mortgages are often bundled together and sold as securities. In recent weeks, escalating subprime problems have caused investors to devalue such securities, as well as the stock of the companies that originated them.
WHAT TO EXPECT
Borrowers. If you have a non-subprime adjustable-rate mortgage or a fixed-rate one, this trend may not affect you. If you have a subprime loan and are concerned that you might not be able to keep up with the payments, consult first with your lender to discuss longer-term loans or more lenient payment plans and terms. Banks don’t want to be stuck holding property, and often they will work out longer-term loans and more lenient payment plans, says Ray Hooper, education and housing director for the not-for-profit Consumer Credit Counseling Service of Greater Dallas. Organizations like his also can take your case to the lender.
Mortgage shoppers. Buyers with good credit histories who are looking for traditional mortgages shouldn’t notice much of a change. But if you want a nontraditional loan, expect to see a tightening of the rules by lenders. Consumers with good credit who want creative financing, such as 100 percent mortgages or stated income loans–where the lender takes your word for what you say you earn–are likely to be scrutinized more closely. Subprime borrowers will find fewer options.
Stock market investors. Unless you invested heavily in the individual stocks of subprime lenders you probably have little direct impact to worry about. Such companies are likely to make up a very small percentage of any diversified mutual fund portfolio, says Joe Brennan, principal and head of portfolio review at the Vanguard Group. Some of Vanguard’s index funds have tiny holdings–less than one-tenth of one percent–of companies involved in the subprime meltdown, including New Century Financial Corp., Fremont General Corp., and Accredited Home Lenders Holding Co.
Bond fund investors. It might be more difficult to learn whether your bond funds are holding risky mortgage-backed securities, says Didi Weinblatt, vice president of mutual fund portfolios at USAA, a San Antonio, Texas,-based financial services company. If you’re concerned, “Call the fund and ask if they have exposure to subprime mortgages,” she says.
Market-watchers are split on whether the current turmoil will lead to more widespread economic problems. As usual, keeping your cool, and your portfolio diversified, are the best insurance.