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Subprime Problem?

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Posted On: 11/18/2009

Q: It used to be that the mortgage crisis was described as a "subprime" problem, but now people with prime loans are beginning to see a lot of foreclosures. Was there something wrong with the prime mortgages made several years ago?

A: If by "prime" loans you mean fixed-rate mortgage and traditional ARMs made to well-qualified borrowers with full loan applications and appraisals, the answer is no, those loans are as well-designed and secure as any mortgages ever written.

There are three main reasons why prime foreclosures are now in the news.

First, the idea of prime borrowers and rising foreclosure levels conflicts and news is often about strife and struggles. In fact, there have always been a small number of prime foreclosures, usually because of a job loss, the death of a spouse, an accident or an illness.

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Second, prime mortgages are a much larger percentage of the marketplace than nonprime financing. For instance, in May the government reported that Fannie Mae and Freddie Mac owned 30.2 million mortgages. Of these loans, 25.5 million were prime and 4.7 million were nonprime.

There were a total of 1,952,000 delinquent loans -- 1,092,000 were prime and 860,000 were nonprime. It would seem that prime delinquencies are a huge "problem" because there are objectively more of them. In fact, the prime delinquency rate was 4.28 percent while the rate for nonprime loans was 18.31 percent. The reason for so many delinquent prime loans is simply that there were many more of them in the first place, not because prime loans are somehow flawed.

Third, it's not the prime mortgages that have changed, rather in many cases it's the economic standing of the borrowers -- as unemployment has risen people who were formally well-qualified to borrow simply do not have the funds to continue their payments.

Q: We've been watching homes on the market for months without a price change. Why don't the owners drop their prices and get their homes sold?

A: A home is a complex asset. It may be made of bricks, but it also represents a host of financial and psychological values.

Financially, it may be that the owners have a particular target price that they "need" to pay off existing debt or to equal the original cost of the property. The problem here is that the marketplace is not based on owner wants or debts, it's based on recent sale values. Whether target pricing is realistic depends on the target -- and the local market.

Psychologically, a home represents such things as ego, status and accomplishment. It can be very difficult for owners to ask for a lower price because that negatively impacts their psychological values and perceptions -- if I sell my house for a lower price does that mean "I" am worth less? What will others think?

Unfortunately the marketplace can be ruthlessly efficient, meaning that asking for the wrong price in the wrong market can be a prescription for no sale - ever.

Q: I went to a closing last week and among the paperwork there must have been three or four separate requests to complete IRS Form 4506. How come?

A: When you completed your mortgage application you claimed certain income and may have provided past tax returns. With an IRS Form 4506 lenders can get back copies of your returns after closing.

Why would lenders want such information after a mortgage has been completed? If the loan is sold the new owners may want to verify the accuracy of the application information. They may pick several loans to audit among thousands they've purchased. Or, if the loan is distressed or foreclosed, the lender may want to assure that the original loan application was correct and complete.

To be certain that the form is not mis-used, always fill in line 6 (the type of form requested) and line 7 (the years you want to make available, and line out any excess spaces). Also, be sure to sign and date the form; it's only good for 60 days thereafter.

If you must sign multiple Form 4506s just complete them all the same way. For specifics, ask the settlement agent for advice.

Peter G. Miller is the author of The Common-Sense Mortgage and a veteran real estate columnist. Have a question? Please write to peter@ctwfeatures.com.

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