Symptoms of a Recession—What They Do to Your Loans
With all the turmoil happening on Wall Street, getting a loan may not be easy at all. What you are experiencing today is a mortgage crisis never seen in decades.
Lenders Shutting Down
Getting a loan is definitely not easy when lenders around you are shutting down. As a matter of fact, quite a handful of lending companies are already on a lay-off of employees and are leaving numerous buyers in awful uncertainty. Do not be surprised to find interest rates and credit terms capriciously changing on a daily basis. Borrowers with bad credit ratings are in the worst strains, with lenders giving them disagreeable loan terms. And as you can imagine, stock investors are getting wary of the housing market.
But not only borrowers with bad credit ratings and their sub prime loans are in for trouble. Even blue-chip borrowers are having a nasty taste of the looming recession and are currently struggling with their loan prepayments.
Doors are Closing on New Loans
During these dark days, doors are hardly open anymore for borrowers with poor credit ratings. Still, they are not the only one having trouble as jumbo loan programs are getting chopped big time. Now it’s much harder to get a mortgage loan in high-cost areas. That dream house in Florida, California and Northeast is now more of a far-away, fairytale-like fantasy. You can also say goodbye to low down payments and affordable equity for new homes.
What you are experiencing now is the virtual disappearance of home loans with even just the mildest element of risk in it. And most company lenders are now weeding out some of their borrowers while admitting that the mortgage crises these days are the worst they’ve seen in 20 years. And things are expected to get worse, with some established lending companies already putting a halt to acceptance of lines of credit and home equity loans.
Sam Molinario of Bear Stearns (BSC) even goes as far as describing the current mortgage crisis as similar in scale to that of the stock market collapse (1980s) and the tech-stock bubble (2000).
Probable Cause
What’s causing all the crises anyway? Some point to the Federal Reserve’s move in early June as the cause. This move involved issuance of a guidance for lending companies that offered adjustable-rate mortgages. This guidance made many large lenders eliminate ARMs that offered low teaser rates and that were also fixed for a 2-3 year period. When the rates started rising above levels that were affordable for the homeowners, the borrowers were in for real trouble.
Want to get a better picture of how the mortgage loan crisis is affecting the overall economy? Take Patrick Jones’ case. Jones is a 49-year old baker who resides in Denver. He bought his residential home about three years ago, a period by which he diligently covered his monthly mortgage payments on time. But times have changed. Now he’s having difficulty coming through with his current monthly payment of $1,800 (after the adjustable-loan was reset), which is $450 more than the amount he used to pay.
Now Jones is forced to say goodbye to his steak indulgence (something he used to do at least one or twice every week). He now has to bear with his regular beans and hot dogs staple. More so, going to the movies is no longer a regular get-away event but more of a luxury he can’t afford.
How many more mortgage borrowers are in Jones’ position? How many more consumers are forced to spend less? No wonder the economy is slowing down. Maybe the looming fear of recession is for real after all.
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