Investing Trends

Real estate in California is generally a hot topic of discussion. People come to California for the weather and then want to stay and need to purchase a home. As we approach the summer of 2007 we find ourselves with the unenviable dilemma of looming foreclosures on some of these homes.

It is not only the newcomers to California who will find themselves in this position, but all of the homebuyers who purchased homes in the last two or three years with little or no down payment and an adjustable rate mortgage. Delinquency on these loans is increasing, even though the rates are lower than for the United States as a whole. Many of these borrowers were either self-employed or had poor credit. Poor credit is defined as someone having a FICO score of less than 620.

These loans are termed sub-prime and have been the target of consumer protection groups who see the next two years as crucial for the survival of these loans. Although the California housing market appears to have stabilized, people are now looking at these loans to see what effect, if any, they will have on the overall real estate market. Sub-prime loans have grown in the past few years so that currently they account for about 15% of all home loans made in California.

The problem arises when these loans reset from their original low interest rates to fully indexed rates. This happens after one or two years, depending on how the original loan was written. Many of those who took out these loans in order to be able to purchase their home initially will find themselves in a difficult spot. When the loans reset the payments increase significantly and borrowers may not be able to make these larger payments easily.

The economy and job growth in California has continued to grow, but that may not be enough for some borrowers. Lenders will work with those unable to make the larger payments by offering several different options because foreclosure is costly for them and for all parties concerned.

This will be the first time that the market has dealt with the possible default or foreclosure of homes due to sub-prime lending to marginally qualified buyers. Whatever happens during the next two years will be indicative of how loans will be underwritten and what qualifications will be required before buyers are able to purchase homes with little or no down payment.

Lessons will be learned during this time that will enable the lenders to take whatever action is deemed necessary and prudent to avoid problems like these to occur in the future.