The recent turmoil that engulfed the sub-prime mortgage market has left Valley borrowers and lenders in a lurch.
Pre-qualified home buyers have watched deals fall apart as certain mortgage products disappeared with tightening lending standards. Mortgage companies have closed up shop. And falling home prices have taken away refinancing as an option for many owners.
The Tribune spoke this week with Jeff Underwood, a loan officer with AmeriFirst Financial in Mesa, about the state of the sub-prime industry and its local impact.
Q: DESCRIBE THE SITUATION THAT’S TAKING PLACE RIGHT NOW IN THE SUBPRIME MORTGAGE MARKET.
A: A lot of companies have offered some mortgage products and programs that were completely outside the box. So we’ve gotten completely away from Fannie Mae/Freddie Mac/ FHA guidelines. Companies started offering nonconforming products, which would be stated income (loans), no-document (loans), low credit scores, and there’s been an appetite for that in the secondary market, the investor market. Until a couple weeks ago they were getting higher yields on those. They were making some money. (Now) investors are seeing a high default rate, high foreclosure rate on those products and are saying we don’t want to buy these right now.
Q: WHAT’S CAUSING THE DEFAULT RATE TO GO UP?
A: Approximately 40 to 70 percent of mortgages written over the last couple of years were these nonconforming products. Specifically for Arizona, I believe those numbers are closer to 60 to 65 percent. Most of those are written on a two-or three-year fixed rate with a two- or three-year prepayment penalty. What we’re seeing is the adjustments happening. There’s $2 trillion total between 2007 and 2008 that will be adjusting. Now ...(borrowers’) mortgage payments (are) jumping, and they want to try to refinance. However, with what’s happening in the industry, there’s no subprime (loan options) to refinance most of these clients into a different loan.
Q: IS THE FACT THAT HOME PRICES ARE DROPPING ALSO HAVING AN IMPACT ON THE SITUATION?
A: Yes. Anybody that bought in the Valley here over the last one to two years — anybody who bought, especially in the outlying areas like your Surprise, your Queen Creek, your Maricopa areas — those are the areas that have gotten hit hardest so far. (Owners are) currently upside-down. So not only is there the fact there’s not product available for them if they haven’t fixed their credit over the last two years, but now they may owe $250,000 and their home is worth $220,000.
Q: WHAT SHOULD HOMEOWNERS DO IF THEY ARE IN DANGER OF DEFAULTING ON THEIR MONTHLY PAYMENTS?
A: According to Foreclosure.com, I think we’re sitting at about 1.4 million homes in pre-foreclosure right now nationwide. So it will continue to get worse before it gets better. If you’re in an adjustable rate, don’t wait until that time frame is up. You need to start the process now as far as making sure your credit’s in line even if you have six months before your adjustable rate changes. They need to get a credit analysis by a mortgage professional, who can tell them exactly what to do to get their credit in line over the next three to six months.
Q: SO WE HAVE FARTHER TO DROP BEFORE WE’RE GOING TO START TO SEE SOME RECOVERY?
A: I was estimating that we would start seeing some recovery probably second quarter 2008. With this liquidity crunch crisis that we’re in right now, I think we’re probably pushing into 2009 as far as seeing some of these (standards) loosen back up a little and allow some cushion for some borrowers.