By Jeff Mandel
RISMEDIA, March 5, 2008-More than 180 regional and national lenders have been forced to close in the last 12 months in what has become an unprecedented meltdown of the mortgage and debt markets in this country.
What started as a subprime lending problem in late 2006 has quickly expanded to the Alt-A and second-mortgage markets. With the inventory of new and resell homes on the market continuing to expand, along with the substantial reduction of available loan programs, all the variables point to more trouble ahead in the U.S. financial markets. This point was extenuated recently when the announcement came that Bank of America was purchasing Countrywide in order to help mitigate the risk of Countrywide’s potential failure.
On behalf of your customers, it is imperative for them to be cognizant of the current dynamics within the real estate and financial services markets. Assisting them with being prepared is incredibly valuable because it could be financially devastating to them if they were to be caught off-guard.
Between the currently fragile borrowing climate and the near meteoric rise in credit fraud and identity theft, it is imperative for consumers to proactively ensure that they are in a constant state of readiness for taking advantage of the most effective loan programs at the lowest-cost loans available. This statement applies whether we are talking about mortgages, boats, cars, credit cards or student loans.
Only one year ago, the interest rate of a home mortgage for someone without a down payment versus someone with 10% down was a difference of about 0.5% in rate. The difference in interest rate between someone with a job and someone without a job was also about 0.5%. In addition, the difference between someone with a 700 credit score and someone with a 580 credit score was 0.75%. Today, there are little or no loan programs available for someone without a job, without a down payment or with a 580 credit score.
Many would argue that there never should have been such aggressive loan programs and that we are only now returning to a level of prudent and fiscally responsible business practices. While this argument is valid, it will not make the transition any less painful for both consumers and lending institutions.
The noted challenges are further compounded because currently one out of 11 households is dealing with some form of credit or identity theft. Many individuals have invested in some form of credit-monitoring program, but monitoring your credit is not enough. It has become essential for consumers to actively manage their credit as well as their overall qualification capabilities.
The combination of the issues noted above along with the tightening of household debt programs creates significant exposure for consumers and the financial services industry.
Most Americans tend to commence conversations with a loan officer at a time of immediate need. Loans related to purchasing a home, applying for a business line of credit, buying a car, or helping a child through school are customarily applied for within weeks of a need but that won’t work anymore.
Many individuals have requested advice regarding what they should do to more effectively prepare themselves for the current market conditions. The answer is consistent for everyone regardless of their financial situation:
- You must optimize your overall credit profile at every opportunity.
- You must get and keep yourself in a constant state of readiness to take advantage of borrowing opportunities.
- You must focus on continually minimizing your overall interest expenditure and debt structure (i.e. liability management).
We are all guilty to some degree of concentrating great time and effort on making money and precious little in saving (or structuring debt). The cost and exposure of waiting until there is an urgent need for a loan is greater today than it has been in at least the last 30 years. Although there are different levels of preparation and readiness, everyone should proactively assess and leverage the various available tools and resources to mitigate the noted risks. Additionally, the current economic conditions enhance our moral and fiscal responsibility to assist our customers with this process.
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