The Center for Responsible Lending released a report that predicted that “nearly a fifth of consumers who borrowed money to buy a house in the past two years will default on their mortages and lose their home.”    The CRL is a nonprofit research organization that specifically and aggressively combats what it refers to as “predatory lending practices” that are becoming more and more prevalent with the current sluggish housing market and the relaxed landing standards.

This prediction seems validated with the announcement last week by the Mortgage Bankers Association report that delinquency rates for mortgage loans are up again in the third quarter. 

So, what is a person to do.  Well, first of all, be very aware of the various loan options and why they are structured the way they are.  If you have bruised credit, consider holding off on the purchase and repairing the damage so that you don’t have to settle for subprime lending options that set you up to become one of the statistics.  Some will argue that renting while trying to repair credit is the equivalent of throwing money down the drain.  But really, if you accept a bad mortgage situation and ultimately end up losing your home — is it really any better? 

As the new year begins, we are welcomed by a real estate market that is going to get tougher and tougher.  Interest rates are on the rise, not just in the United States but globally.  And, just this past Thursday, Susan Bies, noted that it was underwriting practices of lenders that were leading to rises in the number of late mortgage payments.  The risk, she noted, was their fault and they needed to crack down. 

Specifically Bies noted that there was too many instances of lenders combining nontraditional loans (remember the interest only loans I mentioned a week or so ago?!?) and utilizing a “risk layering” practice that put the borrower at risk if the interest rates rose. 

For the borrowers like you and I, it is very important to remember that the more sluggish the housing market is, the more we are at risk.  As the market continues to sink buyers can expect higher risks in the long run and a tougher time obtaining financing in the near future.  This is truly a time when the term “Let the buyer beware” is applicable. 

If you are thinking of purchasing a property this year, you may be concerned about what the market trends are anticipated to be.  I know I am.  So, here is the research I have done.  Throughout the years 2000-2005, at least in the United States, the loan market from extremely good.  As a result of actions taken by the Federal Reserve to revive and stimulate the economy, the borrowing rates for banks hit all time lows.  This of course, had the correct effect, banks borrow money from the reserve bank at next to nothing in fees, and they subsequently reduce the interest rates available to their buyers.  Simple enough. 

In 2006, however, the rates are adjusted slightly and the market starts to slow down and interest rates start to move upward.  So now, here it is year 2007 and the question always is asked — what can we expect this year? 

Well, it is my belief we can expect that the changes we saw in 2006 will continue throughout much of 2007.  Things are going to stay at the slightly moving upward rates — at least for now.  Which means that those people we may think were extremely lucky to get the near nothing interest rates may not be so lucky after all.  After all, they are literally trapped in a situation where there are no real refinancing options available to them without tacking on a substantial amount to their loan due to the higher interest rates.  (Maybe my stalling was really a good thing — probably not — but it is a comforting thought to think while I watch the interest rates crawl skyward).  On the other hand, as the market continues creep up, the activity continues to slow down and/or remain sluggish.  This will eventually cause alarm and the Federal Reserve Bank will have to do something.  Playing with(and in particularly lowering) the interest rates in our economy is akin to a doctor using electric paddles on a failing heart.  It tends to restart things and gets them going back to normal.  Well, at least as normal as the financial world can be. 

Sometimes it happens.  You find the perfect home to purchase but as of yet you haven’t sold the home you are vacating.  You realize you need a short term cash flow relief, but are not sure where to get it.  If you are certain that the current home will sell within the market you are located, consider requesting a Bridge Loan.  The bridge loan is specifically set to provide relief and act as a bridge between these type of transactions.  This isn’t the perfect cure all situation and should be carefully considered.  For one thing bridge loans can carry a very high interest rate, although with diligence and superb shopping skills you may find a reasonable rate.  The other downside is that the property you are waiting to sell often becomes the security of the bridge loan.  If for any reason the property doesn’t sell, you not only have some high interest debt to deal with, but your property could be lost.  As with any financial transaction of this nature, seek some professional guidance before signing anything and remember to read each document carefully to be sure that it contains only those items that you specifically agreed to.

Interest Only Loans are making a resurgence in the Home Equity and Home Buyers market.  Some advertisements are touting them as the “new” option, but in reality interest only loans have a very long history.  During the period of the Roaring 20s, interest only loans were the home loan type of choice in the mid-west.  Then, when the Country entered the Great Depression and the bottom fell out of the stock market, lenders found themselves with a lot of foreclosures, most of which had no cash equity value available to them.  At that point, interest only loans were pretty much shelved.

The same things apply to interest only loans today.  Because there is not a way to promote equity in them, and because when the actual mortgage+interest payments begin, they are often way too high to afford; interest only mortgages are not for the average home buyer.  Sure, they serve a purpose in investment situations where a property will not (hopefully) be held for more than 5 years.  But if you are looking for loan options that allow you to gain equity and still have an affordable payment, stay away from the interest only loan product.  It simply is not for you.

When shopping for a mortgage loan, most people simply look at the interest rate.  If it seems reasonable, then that’s good enough for them and they sign the papers.  Sometimes, however, that approach is no better than taking a stack of twenty dollar bills and lighting a match to them.  The outcome is the same — you have lost money forever.  For one thing, the interest rate really doesn’t tell the whole story.  In addition to looking at the interest rate (yes, it is a major component to the decision), it is also important to also look at all other fees associated with the loan.  Specifically, look closely at origination fees, any processing fees, and closing costs.  Most lenders will provide an estimate document that has all these figures clearly spelled out.  This estimate document gives you the information you need in order to comparison shop the loan figures to other lenders.  Remember, this is a HUGE investment, keeping as much of your money as possible should be your first and highest priority.

A good rule of thumb for the origination fee is about 1.2-1.6%.  Closing costs will generally be in the range of 3-4%.  While these costs could be influenced by the location of the property, anything outside these windows should be considered suspect and investigated throroughly. 

The short version of the concept it this – lenders are in the lending business to make money.  Don’t simply assume they are giving you the best deal to get your business — because, truthfully, they may not be.  Competition, at least in this case, can be a very healthy thing for your bottom line.  Don’t hesitate to ask questions and if you don’t get the answers you need or want, pick up your paperwork and move on to the next lender.  Someone will recognize what you are seeking and give give you the service you deserve.  

Alan Greenspan says the housing adjustment is over, or at least the worst of it. Of course, Greenspan is no longer the chair of the Fed, but he does seem to have a finger on the economy’s pulse nonetheless, and we can only hope he’s right this time, too.

Many believe that home-equity loans are the best way to get fast cash when you need/want it.  After all, the interest rate on home equity loans are generally lower than those of credit cards or unsecured personal loans — which is the fast cash solution to most folks.  The interest will be a bit higher than the primary mortgage since this lender is in the back seat of collection should a bankruptcy occur.  Yet, the interest rates on home equity loans still tend to be very favorable because the lender is still insulated with regard to his risk.

So, is there another reason to consider a home-equity loan? 

Some financial and tax advisors would say yes.  Did you realize that any interest you pay on the first $100,000 of a home equity loan is tax deductible?  It is — and this is the good part — it is tax deductibe regardless of how you might have spent the money!  This figure can go up to $1,000,000 if the money you borrow is to put home improvements in place or buy an additional home.

Now, where else can you get full credit off of your taxable income (up to the limits that apply, of course), and still put money in your pocket?  Exactly.  If used right, a home-equity loan can be a slick tax trick — but don’t just take my word for it, talk your own own tax-advisor to get a more comprehensive explanation of the facts. 

If you’ve ever owned a home in Australia, you might be familiar with mortgage accelerator loans. Now they’ve come to the U.S.

The way this works is, you deposit your paycheck into a special account. Every dime of it. Then, you use that account to pay your expenses, and every dime you don’t spend, goes to pay principle on your mortgage.

I’m not sure this is the best way to prepay a mortgage. I’m not even sure that prepaying a mortgage is really a good idea; I’ve been doing a lot of research on the topic and realize that prepaying does not protect you from foreclosure, where saving that money in a contingency fund could.

But that aside, if you want to prepay your mortgage, this is an interesting way of doing it.

Refinancing is becoming a hot topic these days with the rising interest rates, sluggish housing markets and increased number of foreclosures.  If you’re thinking about a refinance, here’s a few things to consider:

-Why do it?  Well for a couple of reasons.  You may have a variable interest rate loan and be concerned that your rate will raise your payments higher than you can afford to make.  Another reason would be to use the home equity to pay off outstanding debts like credit cards or student loans.

-Is it worth it?  Well, if you plan on moving out of your home in the next year or two, probably not.  You’re more likely to lose money in those instances.  But if you’re planning on lengthy stay, the money you’ll save will compensate for any closing costs.

-Shop around for rates.  Check with different banks and lenders, asking about their rates and terms.  Also ask your current lender about their rates and terms.  They already have business with you and would like to keep it, so they are very likely to offer you favorable terms, especially if you let them know you’re shopping elsewhere too.  Sneaky, but effective.  With the housing markets slowing down, competition for new loans is keen and the lenders know it.

Most important for you to know is that nothing is final until you sign on the dotted line.  Do your research and make an informed decision.