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Your Take: Impact of Subprime Lending Meltdown

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If you haven’t been reading about the “subprime lending meltdown” lately, you’ve had your head in the sand because this thing has pervaded every corner of the financial world and chances are it has touched you in some way. In fact, the other day I was talking to someone and it turns out that American Home Mortgage held his mortgage loan (AHM recently laid off 90% of its workers) so the subprime lending meltdown certainly touched them in a very palpable way (In fact, they were one of the folks who had their escrow check bounce when paying their taxes) Another friend had to jump through hoops in terms of documentation, specifically the gift letter, and even had one lender pull their loan offer when they were looking for a home. We’re talking financially responsible, high credit score individuals here; not what you would associate with a subprime lender. The tentacles of this thing have spread everywhere and everyone is spooked.

Here’s another impact… If you were looking to get a jumbo mortgage loan, a loan greater than $417,000, then you’ve been affected too because those rates have spiked since Fannie Mae and Fannie Mac don’t buy jumbo loans. Instead of paying something like 6% you’re talking about paying a minimum of 7.5% to 8% – that’s a significant impact especially considering it only affects the more expensive loans. The reason for this is simply because you would be getting a loan that Fannie Mae and Fannie Mac won’t buy, so lenders are scared (but not so scared they won’t lend you money of course).

Personally, it hasn’t really impacted me because my mortgage has been pretty vanilla, a 30 year fixed mortgage at around $230k. The only noticeable impact has been in my retirement assets because they’re mostly in index funds and those funds gave a little something back last week.

So I’m interested to know, has the subprime meltdown affected you or someone you know? I’m curious to hear how widespread this has truly become.

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8 Responses to “Your Take: Impact of Subprime Lending Meltdown”

  1. FatLady says:

    Big impact in the Phoenix, Arizona area: the county tax assessor revalued houses based on the inflated costs at the height of the bubble. Houses are no longer worth that, but guess what? We get to pay for it, anyway. You can be sure property taxes will not go down–never have, never will. Though my house is paid off, as I near retirement I wonder if I will be able to stay in my home, or whether steadily increasing taxes will force me to sell and spend my old age in a rabbit-warren condo.

    Other effect on everyone, victim of subprime mortgage hustles or not: real estate is not moving. Houses sit on the market for month after month; cutting the asking price does nothing to attract buyers. The only way to unload a house right now is to practically give it away…and even that sometimes doesn’t work. If I wanted to sell my house for the amount I would need to downsize now, I couldn’t. Neither can anyone else.

  2. Aimee says:

    Luckily, our loan is a very simple one and has not been effected. But of course it has effected us, like we wouldn’t be able to sell our home as easily if needed, and if the government does some sort of bail out our taxes will likely be effected.

    Sad that people had to be greedy (lenders) and that so many borrowers were uneducated about what they were doing.

  3. SmBizMan says:

    I’m north of Boston and I may have been one of the last easy-money mortgage takers. It was last May, and it was a “no doc” 30 year fixed 268,000 loan… plus 33 000 second mortgage. I had 10% down…

    I really enjoyed not needing to provide documentation for anything. It was a little scary though, I originally applied for $230,000 and they had no problem giving me 300,000 (and probably more)

  4. zh says:

    It has affected us as renters in Los Angeles (south bay area), because rents are now through the roof. No one wants to buy, everyone wants to rent, so landlords can charge whatever they want. When we moved into our current apartment (3bd, rent: $2K/month) in Sept of 2005, we thought we’d find a house to rent easily, but two years later we are in our same apartment, and renting a 2 bedroom house is $2500 – $2700/month. We’re stuck; and we can’t even look into real estate because the average house price (or even townhouse price) in our part of town is $700 – $800K. Way too jumbo for me. (Solution: move to reasonable area of the country. We’re workin’ on it.)

  5. Steve says:

    Interesting post…I will certainly watch the comments, too. I was able to buy a few years ago with a fixed rate under 6% and nothing down. Living near Baltimore, I had plenty of appreciation before the market flattened in the past few months, enough equity in fact to remove PMI very recently.

    On a related note, am I the only one that thinks it is dumb to make the jumbo loan criteria a fixed amount. Not only would almost all loans in higher cost of living areas ( CA, NYC, etc.) be considered jumbo, would it really be a “risky” loan for the bank if I made $500k a year and took out a $420k loan?

  6. Chris says:

    I had the unfortunate luck to re-fi last year to get some equity out to pay bills. I really needed to pay them off, so I took some unsavory interest rates hoping to re-fi again in a year for lower rates. Well my timing couldn’t have been worse as my re-fi time is NOW and it’s nearly impossible to get refinanced without a 700 credit score which I do not have right now (close but close only counts in horse shoes and hand grenades as my grandfather always said) and so I sit stuck with a 13% interest rate! BLAH!!!!!!

  7. I think the ripple effect is going to be seen overseas a lot more than here. U.S. banks have ‘farmed out’ these sub-prime loans to European banks, who like these fixed-income investments as a basis to counterbalance their other riskier portfolio loans. No one seemed to think that these supposedly stable investments would end up being risky.

    There’s a few Euro banks that are starting to show problems even worse than here in the U.S.

  8. Jason says:

    Impact wise, I took a hit on my net worth of about 10% at the end of July, but that has now more or less returned. But I have a conspiracy theory about the subprime meltdown. I wrote a post about it on my blog, but here is the gist of it.

    “The market reactions to the credit crunch seems rather irrational, unless one realizes that in these types of corrections the money investors loose just doesn’t disappear. Someone is making money when they sell. And, in my opinion, the only people who have the ability to move markets the way we saw in the end of July or after 9/11/01 are the institutional investors.”

    You can read the rest if you are interested at My Blog.


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