Sub-Prime Mortgage Market Collapse, Effect on My Buying/Keeping a Home?

Some evidence of part of what had to be happening to sustain the sub-prime mortgage tidal wave is posted on another blog today.

Specifically, ratings agencies base the ratings of bond funds that are securitized by sub-prime mortgages by assuming continued rising real estate prices. For how long? Forever.

Hey, 50 years plus in the U. S. of rising prices, why would that change?

The linked article relates a conversation with one of the bond rating agencies in which they admit their model fails if home prices decline.

Guess what happened in 2005? The streak of rising home prices ended.

To generalize, the downward spiral of home prices feeds on itself. The lower prices prevent the refinancing pyramid that allowed homeowners to refinance into higher mortgages, based on higher home value, or to switch to a new ARM with a teaser rate, to keep the payments down so they could stay in their house.

Now the equity is gone, standards are tightening, and a record volume of ARMS are coming off the artificially low introductory teaser rate.

Result: foreclosures up, more homes on the market, fewer buyers, lower prices.

The problem with a buyer’s market in houses is, by definition, it is a bad time to sell if you already own your home.

If you are a first time buyer, trying to time the bottom is always difficult. You do not know the bottom point until after prices start to climb again. Many experts predict it will take years to unwind this bubble.

If you are in a Chapter 13, or contemplate filing one now, get a realistic appraisal of what your house is worth. Probably when you filed your case, there was equity, in that the home was worth more than was owed. The starting point of your analysis should be what is the value, what can I sell it for today, as is, and how much do I owe?

Many of my clients believe they cannot get another house if they lose the one they are trying to buy now. Not so.

With the excess inventory, as the realtors call it, of houses for sale, supply exceeds demand, prices will fall.

With the tightening of mortgage lending standards, I believe old style financing alternatives will increase, such as land contracts and renting with option to buy.

No easy answers, but at least get all the facts before you file or stay in that Chapter 13 to keep a house that is now worth less than you owe. Get the objective facts on what it is worth and what it costs you to keep, including the monthly payment in the Chapter 13.