What the Mortgage Meltdown Means to You

As of this writing (August 22, 2007), the mortgage market has been in the news almost daily, and for good reason. I’ve received calls from several past clients asking for insights on what it all means to them. I thought that I would put together an FAQ to address questions that may be on your mind:

Does the Fed rate cut on Aug. 17 imply that mortgage rates will fall?
No. The Discount Rate cut applies to borrowing by big banks. It does not help small borrowers. If the Fed had cut the Fed Funds rate, it would have helped people trying to borrow to buy a house. But that rate has not been changed.

What happens if my mortgage company goes bankrupt?
If your mortgage company files for bankruptcy, another company will take over the servicing of the mortgage. The new owner of your mortgage will expect you to pay every month. If you stop payment because you think your bankrupt mortgage company won't care, prepare for the consequences.

What happens if I apply for a mortgage with one of these troubled mortgage companies?
You might not qualify for a mortgage that you could have gotten a month ago. If you started the home buying process, say a month ago, and you haven't locked in a rate that you could afford, chances are good that your options have gotten worse. That's because there's less money around for mortgages since the credit crunch started a few weeks ago. The people who get that mortgage money will be the ones willing and financially able to pay a higher rate.

What should I do if my mortgage rate adjusts so high that the payments are over my head?
While rare in the Bay Area, this could happen. Talk to the company that services your mortgage and ask for a new payment schedule. This is a tough situation because often the company that originated your mortgage has sold it to another company -- a mortgage servicer. The mortgage servicing firm is the one that sends you your monthly bills and collects the checks you write. Try to talk with the mortgage servicing firm to ask if it can change your payment schedule. Unfortunately, only the owner of the mortgage might be willing to make that change. But if that owner is an institutional investor in Germany that owns your mortgage and 14,000 others as part of a mortgage-backed security, you will probably be out of luck.

Is it dumb for me to buy a house now with all this going on?
Perhaps. With mortgage money in shorter supply, some home buying transactions may fall through. As such, there may be some opportunistic buys available for those who can move quickly and decisively. The only downside is that purchasing a property will cost you more due to the surge in interest rate. In the Bay Area, where the economy is strong, I never believe it foolish to purchase a home. I’m bullish on the location feel that buyers can rest assured that in the long run, you’ll be in possession of a historically appreciating asset.

When in doubt about what to do, please don’t hesitate to call me or my father, Daniel Abta, a mortgage broker, at (408) 739-6465, or at DanielAbta@aol.com