Surviving the mortgage market crash
by Brian Egeston
be@brianwrites.com
Richard Dorfman, president and CEO of Federal Home Loan Bank of Atlanta has worked with banks and investors for more than 20 years -- Long enough to know that unscrupulous mortgage brokers may have attributed to the current slump in the housing market and long enough to know that the chaos, is only temporary.
Dorfman addressed more than 75 DeKalb business professionals at the DeKalb Chamber of Commerce first Monday lunch that was held at the Emory conference center.
Though not all in attendance work in some sort of real estate capacity, Dorfman assured the audience that the current state of housing affects everyone.
“There isn’t anything more important than housing,” said Dorfman. “It’s where we live, it where we keep our families.”
Dorfman added that the U.S. is suffering from the tremendous affect of a slowdown caused by a housing market that was moving far beyond what anyone expected and eventually reached a level where it was considered out of control. Much of the control was lost when consumers were given the ability to borrow money at incredibly low rates through the use of option ARMs or adjustable rate mortgages.
Dorfman explained how the global economy is impacted by the U.S. mortgage crisis. “Ever yday $4.5 trillion in mortgages are traded,” said Dorfman. “The largest source of mortgage funding comes from Asia.
Wall Street has turned subprime mortgages into bonds and sold them all over the world, so the question becomes, ‘Who’s got your mortgage?’” When mortgages are traded, homeowners may have difficulty seeking help in desperate times such as the need to refinance when their interest rate balloons.
Mortgages have an impact on investors. Large corporations cannot afford not to invest. It becomes costly and risky for a company to operate solely on cash. Worldwide, Dorfman said, the number one investment is U.S. Treasury bonds, which encompasses mortgages that are converted to bonds and traded.
According to Home Equity News, Countrywide Financial was the third-largest lender to subprime borrowers in 2006, after HSBC and New Century Financial.
Countrywide’s CEO Angelo Mozilo announced that the company is officially out of the subprime business.
This after the company’s attempt to create more ownership opportunities for minorities and low-income citizens. But by the end of June last year, nearly 25 percent of Countrywide's subprime borrowers were behind on their loan payments. Because of the mortgage industry woes, Mozilo said he anticipates that Countrywide's business will decline 25 percent next year compared with 2006. The company has announced it will terminate up to 12,000 employees.
The news from the mortgage debacle is hardly the Stock Market crash of 1929. Dennis Estrada, an expert on mortgage calculations and private mortgage insurance calculations offers the following tips for surviving the mortgage meltdown.
1. Stay on top of the mortgage interest rate
At the end of the introductory low interest rate period, the interest rate will increase. In case of a higher interest rate, the income of the borrower must be able cover the mortgage payment.
2. Watch the trends of interest rates
Many borrowers don’t understand how the adjustable rate mortgage works. With the adjustable rate mortgage, negative amortization may occur. Negative amortization happens when the mortgage payment does not cover the interest.
3. Know the different mortgage refinancing options
A mortgage broker can help direct the borrower to the best option if a borrower is able to take advantage of a drop in interest rate.
4. Set aside an emergency fund
The emergency fund is a set of funds for living expenses in case of income loss. Three to six months of salary is a general rule of thumb.
5. Consider renting out for extra room as a source of income
If there is an extra room, such as a furnished basement, homeowners can rent out the extra room for extra source of income. The rent revenue may cover the spike on mortgage payment.
6. Cover the loss of income with mortgage insurance
Loss of income, accidents, illnesses are reasons why mortgage payments are missed. Mortgage insurance will protect the family during these emergencies.
7. Realistic personal budget
Discipline is the key for financial security. Look for ways to cut off unnecessary expenses. Set a realistic personal budget to satisfy financial obligations.
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