Monthly ArchiveDecember 2006

Chicago Mortgage Administrator on 20 Dec 2006

Sub-prime Mortgages: Good or Bad?

11th Largest U.S. Sub-prime Lender Goes Under….

Ownit Mortgage Solutions Inc., supposedly ranked 11th for issuing U.S. sub-prime mortgages announced its closing this past December 7th. The California-based home lender was purchased for expansion, in 2003, by its CEO William Dallas, Chicago- based CIVC Partners and a group of other investors. 2 short years later it became part-owned by Merrill Lynch & Co., the 2nd largest securities firm in the world.

Ownit, BNC, Countrywide Financial, and several other “sub-prime” lenders have been shutting down, as the housing market slows. The primary reason is that now with the slow in the housing market, home prices are falling, adjustable rate mortgages now face higher payments, so more borrowers are delinquent with payments.

Sub-prime Loans

What is a “sub-prime” loan? Well, a sub-prime loan is a loan with higher rates, that allows less qualified borrowers the ability to borrow the money for a home. The rates are higher to cover the risk of lending money to underqualified borrowers. The higher the credit score, the lower the rate, just as with typical “prime” lenders. However, sub-prime lenders will always have a substantially higher rate than that of “prime” lenders.

Who Gets Sub-Prime Loans?

Well this is a tricky question, because mortgage loans include a lot of variables such as: income, assets, credit score, credit history, and down payment. Typically those with a good score need not worry about sub-prime mortgage loans. Those with fair and moderate credit usually rely on showing proof of income and assets to boost their ability to qualify for a “prime” loan, but sometimes will fall short and have to work with a sub-prime lender. Those individuals with an obvious short-coming in their credit score are the primary target for sub-prime lenders.

So why are sub-prime borrowers in trouble?

A loan that is almost surely exclusive to the sub-prime lending market, is the 2/28 Adjustable Rate Mortgage. Several home owners have found themselves in trouble when the market becomes very slow and housing prices drop, because that unfortunately means, what? Home loan interest rates will rise.

What the 2/28 does for borrowers is it gives them a fixed rate for 2 years and thereafter the rate is increased to that of the current index rate plus a margin.

For example: Imagine taking out a loan for a dollar from a sub-prime lender. The current index rate is 2% which accrues daily in our case, to make the example easier to follow. Your credit is not so good, so you get it from the sub-prime lender at 5%. This 5% is your fixed rate for 2 days (we’re going to substitute days for years to make this all work out).

If our loan term was for 2 days and we have to pay every 12 hours, we would make payments of $0.275 (so twenty-seven and a half cents) every 12 hours to pay back our dollar plus interest to our sub-prime lender.
So in 2 days with the sub-prime lender you would owe them $1.10, whereas with the prime lender it’s only $1.04.

Here’s what’s tricky, after 2 days, your interest rate raises to the current plus a margin. So say you’ve agreed to pay 5% as your fixed, and a 2% margin. Well here is where borrowers get into trouble. Loan terms are never for just a couple of days. But using our example let’s say our term is 30 days.

Well after the 2nd day the rate equals the index’ which in our example will be 6%, because the housing market has slowed and the pricing of houses has plumitted.

So the poor sub-prime borrower is now subjected to an interest rate of 6% + 2% (the margin), which equals a whopping 8%.

I’m sure I don’t even have to finish calculating for home buyers to get the picture. Eventually borrowers can’t maintain payments and default on the loans.

And that’s exactly what is happening to several of the sub-prime lending companies, such as those named above.

So you make the decision, good or bad? Be informed with your choices before selecting a lender and make sure you’re not a prime borrower getting sucked into a sub-prime loan.

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chicago-condos & Chicago Real Estate & Chicago Homes & Chicago Property & downtown chicago condos & pre-construction condos in chicago & Condominium Chicago & condos for sale in chicago Administrator on 07 Dec 2006

Parkside of Old Town Will Replace Cabrini Green

Parkside of Old Town, a multifamily development with over 760 townhomes, condos and apartments, is now under construction on Chicago’s Near North Side. This $225 million venture will replace some of the Cabrini Green housing projects. The buildings that composed Cabrini Green once held 35,000 people, but only about 1,500 are left.

The redevelopment of this area–bordered by Seward Park and Larrabee, Division and Oak streets–is part of the $1.5-billion CHA “Plan for Transformation,” which has demolished high-rise public housing towers and developed mixed-income, mixed-use neighborhoods in their place.

Former residents have formed a development partnership with two companies, and Kimball Hill Urban Centers, to build Parkside. When it is finished, the project will be made up of about 20% low-income housing, 30% rental housing for current and returning Cabrini residents, and 50% market-rate housing and apartments.

Parkside will replace three of Cabrini’s high-rise buildings, but Peter Holsten, president of Holsten Real Estate Development Corp., says that it shouldn’t carry with it any of the stigma of the gang-infested former projects. A similar project managed by his company, a development called North Town Village, has been quite successful, with about the same combination of market-rate and affordable homes and few vacancies. “If it’s a strong area, people will want to live there,” Holsten says.

Construction has begun on 280 homes–townhomes starting at $499,000 and condominiums priced from the low $200s. The company has about 100 contracts for the for-sale units, and once the firm sells another 14 units, Holsten said construction can begin on the second condominium high-rise building.

Chicago real estate, Chicago condos, Chicago homes, Chicago townhomes, Old Town, Near North Side

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Chicago Real Estate & Chicago Homes & Chicago Property Administrator on 06 Dec 2006

Selling Your Home? Have It Inspected First

Most sellers wait for a buyer’s offer before having their homes inspected. But when buyers’ inspectors become involved, they bring with them a costly flood of demands. Buyers ask for the maximum of repairs and upgrades, and sellers–often worried by a lack of competing offers–tend to give in.

Rob Kent of Pittsburgh Property Inspectors in Pennsylvania says that only 1 to 2% of his business is for sellers. He maintains that the time to identify problems is early, when “the seller has the chance to shop around for the lowest price [to repair them].”

Sellers can also manage the scope of the work done to resolve problems. If a basement shows evidence of moisture, for example, a buyer may demand elaborate solutions costing upwards of $10,000. But Kent says it “could just be the foundation needs to be regarded” to channel water clear of the walls–which can be done for under $500.

“I see that constantly–where the seller could control their costs but they wait too long,” Kent says.

Linda Lehman, a newly single home seller in Charlotte, NC, was “scared that . . . I’d have to make $10,000 to $20,000 in repairs” in order to sell her 30-year-old home. She worried that problem areas would pare down her asking price, and also that she’d need to make expensive repairs to satisfy buyers–both of which would cut her proceeds.

Instead, she invested $600 on her own home inspection, and considers it well worth the price.

“It was worth it to have the peace of mind that I don’t have any major issues,” she says. She’s also considering adding a home warranty policy assuring buyers that any problems with appliances and heating/cooling systems are covered.

Lehman advises all single women to hire an inspector before entering the selling market.

“I think buyers tend to look at anything wrong as symptomatic that the house has problems, and it gives them the idea they can walk from the deal,” Lehman says. “I wanted things to be as right as they can, so there are no surprises at the end.”

Chicago real estate, Chicago homes, home sellers, sell your home

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