Eisrael Gomez Realtor - Monterey County Blog

According to an artilce published in today's Wall Street Journal federal bank regulators have begun cracking down on loose lending standards on subprime mortgages.   This comes as a result of the increase in defaults by borrowers on such loans.  Some are beginning to face federal criminal inquiries.  New Century Financial out of Irvine  learned of the federal probe in a letter from the U.S. attorney for the central district of California.

The article also states "During the surge in subprime lending in the past several years, many lenders have pushed home loans that carry a fixed rate for the first two years, then "reset" to a much higher rate that floats with the general level of interest rates. These loans -- known as 2/28 mortgages -- can lead to jumps of 50% or more in monthly payments after the initial period ends. Many of the borrowers refinance to avoid these "payment shocks," generating more fees for lenders and mortgage brokers. "  Percentages of defaults on subprime loans have doubled from 2005 levels. 

The result will be fewer loans written this coming year without verification of income and those that don't require down payments. 

How to protect yourself?

The best way to protect yourself is to confirm that you can make the payments on your new purchase after the introductory period ends and your payments go up.  Most reputable lenders will make it very clear what your maximum payments will be after the period of fixed lower payments. 

In the past the higher payment was not an issue becuase you were easily able to refinance the loan before the introductory period ended.  This usually was not an issue as home values were rising to keep pace.  Many Monterey County homeowners are finding they now owe more to the bank than what the home is worth.  This puts the brakes on any refinancing plans.  Many Salinas Valley and Monterey Bay locals are being surprised by higher payments they can't afford and banks that are not willing to help refinance.

Seek the advice of a professional if you find yourself in this situation.  Everyone's circumstances are different so talk to your CPA, Realtor and or Attorney.  Many predators & scam artists are preying on locals who are in this situation.  There are ways to resolve the stress involved in these situations.  If you or anyone you know find themselves in this situation or have any questions, please feel free to post a comment here or contact me.